Our fund’s performance during the second quarter was largely unchanged from where your first-quarter statements ended, with Rowan Street declining approximately 1% during the quarter. That brings our net return for the first half of 2026 to -21%.

While the stock prices of many of our holdings have remained under pressure in 2026, the businesses themselves have continued to execute well. We’ve seen periods like this several times throughout Rowan Street’s 11-year history, where stock prices temporarily diverged from underlying business performance. They are a natural part of long-term investing, and we believe that, over time, business performance ultimately drives investment returns.

With that, let’s set the stock market aside for a moment.

Imagine you had been away for the past six months—with no internet, no financial news, and no way to check stock prices. If you owned these businesses privately, the only question worth asking upon your return would be:

How are the businesses we own actually performing?

Let’s answer that question. The following is the report we would want to receive as business owners.

Business Owner’s Report

Meta Platforms (META)

Business Update:

Meta delivered another exceptional first half of 2026. Revenue grew 33% year over year to $56.3 billion in the first quarter, followed by another 28% increase to $60.8 billion in the second quarter. First-half revenue reached approximately $117 billion, while trailing twelve-month revenue surpassed $228 billion, up 26% year over year. Meta’s Family of Apps now serves approximately 3.6 billion people each day.

Perhaps most encouraging, the company’s AI investments are already producing measurable results across engagement and advertising. Instagram time spent grew at a double-digit rate, while Facebook video time increased 9%, driven largely by improvements in AI-powered recommendations. At the same time, ad impressions increased 14% and the average price per ad rose 12%, helping Family of Apps advertising revenue grow 27% during the second quarter.

Meta’s AI-powered advertising products are also scaling rapidly. Advantage+, its suite of automated campaign tools, has reached a $75 billion annual revenue run rate, while more than nine million small businesses now use at least one of Meta’s generative AI creative tools. Recent improvements to the company’s advertising models increased ad clicks by 8.3% and conversions by 15.7% on Facebook.

Market Narrative:

Despite another quarter of exceptional revenue growth, investor attention remained firmly fixed on the cost of Meta’s expanding AI ambitions. Capital expenditures reached $31 billion during the quarter, reducing free cash flow to less than $1 billion, while management raised the lower end of its expected 2026 capital expenditures to $130 billion.

The market’s concern is whether Meta’s AI infrastructure investments will ultimately earn attractive returns on the enormous amounts of capital being deployed. While AI is already producing measurable benefits across advertising and user engagement, investors remain uncertain about how large those benefits can ultimately become and how quickly emerging opportunities in AI agents, subscriptions, model APIs, and enterprise services will translate into meaningful earnings and cash flow.

Our Perspective:

Now let’s zoom out and evaluate the business as owners.

While investors continue to debate the long-term returns Meta will earn on its unprecedented AI infrastructure investments, we find it useful to step back and evaluate the business over a longer time horizon. Since we first invested in Meta back in 2018, the company’s annual revenue has increased from approximately $48 billion to more than $228 billion.

More remarkable than the increase in size is the durability of the business. After navigating Apple’s privacy changes, intensifying competition, the metaverse investment cycle, and now an unprecedented buildout of AI infrastructure, Meta managed to return to roughly the same rate of growth it achieved in 2019 despite now generating nearly 5x as much annual revenue. Think about it — a business serving approximately 3.6 billion people and generating more than $228 billion in annual revenue is still growing at nearly 30% per year.

No one can know today what return Meta will ultimately earn on its current AI infrastructure investments. However, the evidence so far is encouraging. Many of the improvements driving today’s business—higher engagement, better advertising performance, and new AI-powered products—are the direct result of Meta’s investments in artificial intelligence.

When outcomes are uncertain and the investment horizon stretches many years into the future, we believe it is often more important to evaluate these decisions in the context of management’s long-term capital allocation record. Mark Zuckerberg has repeatedly demonstrated a willingness to make large, unpopular investments years before their economic benefits became widely recognized. That history does not guarantee success this time, and some investments—most notably Reality Labs—have yet to demonstrate attractive economic returns. Nevertheless, his record as a founder, business builder, and capital allocator gives us confidence that these decisions reflect a thoughtful capital allocation process informed by far deeper insights into the business than we, or the market, can reasonably have.

Overall, our conviction in Meta has only increased since we first invested in 2018. Although Meta’s share price has appreciated substantially over that time, the underlying business has improved even more. In our view, Meta is a stronger business today, with wider competitive advantages and greater long-term earnings power than when we first became owners.

For readers interested in a more detailed discussion of how our Meta thesis has evolved, we recently published a separate essay: Why We Like Meta More Today Than When We First Bought It.

Tesla (TSLA)

Business Update:

Tesla continued to make progress on what we believe are the initiatives that matter most over the long term. The company achieved record Q2 deliveries, exited the quarter with its largest order backlog since 2023, and management noted that production is increasingly constrained by supply rather than demand.

Perhaps most notably, Full Self-Driving (FSD) is becoming a primary driver of customer demand. As Musk remarked, many customers are now “buying Full Self-Driving with a car attached” rather than simply purchasing a vehicle. Robotaxi operations also continued to scale during the quarter. Tesla expanded service to seven U.S. markets, including Texas, Florida, and the San Francisco Bay Area, with autonomous miles driven increasing by more than 10% each week. Management emphasized that the pace of expansion is being dictated not by demand, but by safety. Optimus also remains on track to begin production, although management emphasized that manufacturing will likely scale gradually given the unprecedented complexity of building what Elon Musk believes could ultimately become the largest product in history.

Tesla also continued investing aggressively in the infrastructure supporting its long-term roadmap. Management expects capital expenditures to exceed $25 billion this year and continue increasing over the next several years as the company expands Robotaxi, Optimus, AI compute, semiconductor manufacturing, energy storage, and vehicle production capacity.

Market Narrative:

The market remains focused on the length of Tesla’s investment cycle. Management now expects capital expenditures to continue increasing over the next several years as the company builds out Robotaxi, Optimus, AI infrastructure, and semiconductor manufacturing. Investors are questioning how long profitability and free cash flow will remain under pressure before these investments begin generating meaningful returns.

Our Perspective:

Our investment thesis remains unchanged since we first became owners a little over a year ago. We continue to believe the market is largely focused on the visible costs of Tesla’s current investment cycle, while placing less value on the interconnected ecosystem the company is building beneath the surface. Tesla’s advantage is not one isolated technology or product, but a collection of reinforcing capabilities—including manufacturing, real-world data, artificial intelligence, software, energy, and vertical integration—that we believe continuously reinforce one another, making the overall system increasingly difficult to replicate.

For readers interested in a deeper discussion of our investment thesis, we recently published Tesla’s Invisible Moat: The Most Elegant Physical AI Training Program Ever Built, where we explore why Tesla’s moat is deeper than the market may appreciate—and why we believe competitors will find it exceptionally difficult to replicate.

Shopify (SHOP)

Business Update:

Shopify reports its Q2 results on August 5, so this update reflects the company’s Q1 performance. Shopify delivered another outstanding quarter. Revenue grew 34% year over year to $3.2 billion—its strongest quarterly growth in four years—while Gross Merchandise Volume (GMV) increased 35% to $101 billion, marking the second consecutive quarter above the $100 billion threshold.

Growth remained broad-based across the platform. B2B revenue increased 80%, Shop Pay revenue grew 59%, free cash flow margin remained a healthy 15%, and core operating income more than doubled to $382 million.

Market Narrative:

The market remains focused on the potential impact of AI-powered shopping agents. As consumers increasingly use conversational AI to search for products and make purchases, some investors question whether traditional e-commerce platforms will remain as important in facilitating online commerce.

Our Perspective:

We came away from the quarter with the opposite conclusion. Rather than being disintermediated by AI, Shopify appears to be positioning itself as one of the foundational infrastructure providers for agentic commerce. Through initiatives such as the Universal Commerce Protocol, the company is helping establish an open standard that allows AI shopping agents to discover products, interact with merchants, and complete purchases using Shopify’s commerce infrastructure.

If AI increasingly becomes the interface through which consumers shop, we believe Shopify is working to ensure those transactions still flow through its platform rather than around it.

For us, the broader investment thesis remains unchanged. Shopify continues to evolve from an e-commerce platform into an increasingly comprehensive commerce operating system, providing merchants with more tools, more services, and deeper integration across their businesses. We believe AI will accelerate that evolution rather than disrupt it, making Shopify even more valuable to merchants over time.

Topicus (CVE:TOI)

Business Update:

Topicus reports its Q2 results on August 5, so this update reflects the company’s Q1 performance. Topicus delivered another solid quarter. Revenue grew 23% year over year to €435.7 million, while organic growth remained positive at 5%. Although reported net income declined 24%, the comparison is distorted by a one-time gain recognized in the prior year. Adjusting for that item, underlying earnings increased by approximately 42%.

The more important development over the past year has been capital allocation rather than quarterly earnings. Topicus built a ~25% ownership stake in Asseco Poland, its largest investment to date, investing approximately €413 million at an estimated valuation of roughly 8x EV/EBITA. Since then, Asseco’s shares have appreciated significantly and now trade closer to 20x EV/EBITA, suggesting Topicus acquired a well-run acquirer of vertical market software businesses at a substantial discount to today’s market value.

Market Narrative:

Despite continued business progress, Topicus shares remain well below their 2025 highs. The decline has been driven primarily by a broader de-rating across vertical market software, as investors weigh the potential impact of artificial intelligence on legacy software businesses. This pressure has been more acute for Topicus than for its parent, Constellation Software, reflecting its smaller scale, higher visibility to the Asseco Poland transaction, and greater sensitivity to sentiment in European software markets specifically.

Our Perspective:

We believe the market is placing greater emphasis on near-term uncertainty than on the qualities that have made businesses like Topicus successful for decades.

The company’s software is deeply embedded within mission-critical workflows across government, healthcare, financial services, and other specialized industries where switching costs remain exceptionally high. While artificial intelligence will undoubtedly reshape software over time, we believe these businesses are better positioned than the market currently assumes. Management has openly acknowledged AI as an important technological development to monitor, which we view as a sign of disciplined leadership rather than complacency.

Perhaps more importantly, the Asseco investment illustrates exactly why we own Topicus. This was a large, patient allocation of capital into a high-quality business trading at a depressed valuation—an investment that has already created meaningful value. In our view, capital allocation of this quality remains one of Topicus’ greatest competitive advantages.

Constellation Software (TSE:CSU)

Business Update:

We initiated our Constellation Software position during the first quarter of 2026, building on the experience we’ve gained over the past four years as shareholders of Topicus, a Constellation spin-off we have owned since 2021.

Constellation is one of the most remarkable businesses we have ever studied. Since going public in 2006, it has compounded shareholder capital at approximately 28% annually while growing revenue at roughly 23% per year and operating profit at nearly 29% per year.

Operationally, the business continues to execute well. First-quarter revenue increased 20%, while free cash flow available to shareholders grew 44%. During the quarter, Constellation deployed a record $766 million into acquisitions and has committed another $786 million since quarter-end, continuing the disciplined capital allocation that has defined the business for decades.

Market Narrative:

The market’s concerns appear centered on two issues. First, the same questions surrounding artificial intelligence that have weighed on Topicus and the broader vertical market software sector. Second, founder Mark Leonard’s decision to step down as President for health reasons in late 2025, creating understandable uncertainty around the future leadership of one of the world’s most respected capital allocators.

Our Perspective:

Our view differs from the market on both issues.

On artificial intelligence, we believe the market is underestimating the durability of Constellation’s businesses. Much of its software sits at the center of mission-critical operations within governments, healthcare systems, utilities, education, financial services, and other specialized industries. These are not applications that can simply be replaced by a better AI model. The switching costs are operational, organizational, and deeply embedded within customers’ daily workflows.

On leadership, we believe one of Mark Leonard’s greatest accomplishments was designing Constellation so that it would not depend on him. The company’s decentralized operating model, capital allocation framework, and culture have been built deliberately over decades. Mark Miller, who has been with the company since its first acquisition in 1995, has stated that neither the strategy nor the operating philosophy is changing.

We wish Mark Leonard the very best in his recovery. We also believe the enduring value of Constellation lies not in one individual, but in the decentralized system he spent decades building. In many ways, creating a business capable of thriving beyond its founder may be one of his greatest achievements.

For readers interested in a more detailed discussion of these issues, we recently published a separate essay: Our Investment in Constellation Software Amid Elevated Uncertainty.

Why Haven’t the Stocks Followed?

After reviewing each of our businesses, a natural question remains. If these companies continue to execute so well, why haven’t many of their stock prices followed?

We believe the answer has less to do with how our businesses have performed over the past six months than with where the market’s attention has been concentrated during that same period. While our companies continued to strengthen their competitive positions, investors directed much of their enthusiasm elsewhere.

Much of this year’s market leadership has come from companies supplying the physical infrastructure behind artificial intelligence. Memory manufacturers, semiconductor companies, and other businesses enabling the AI buildout have produced extraordinary returns as investors have poured capital into the sector. At the same time, many companies actually deploying AI into products used by customers every day—including several we own—have seen far less recognition despite continued operational progress.

The enthusiasm behind this investment cycle is understandable. OpenAI and Anthropic have grown at rates with almost no precedent in enterprise software history, leading Amazon, Microsoft, Alphabet, and Meta to collectively commit an estimated $700 billion toward AI infrastructure during 2026 alone. Artificial intelligence is clearly one of the most important technological shifts of our generation and has the potential to become one of the most consequential technological transformations in human history.

The investment question, however, is different from the technology question.

Today’s market prices increasingly assume that today’s extraordinary growth rates will continue for many years. That assumption may ultimately prove correct. It may not. We simply don’t know. What we do know is that when expectations become exceptionally high, the margin for error becomes exceptionally small.

We don’t know when—or whether—that concentration unwinds. Making that kind of prediction isn’t part of our investment process, and it never has been. History reminds us that periods of extraordinary enthusiasm come and go. Our response has never been to predict when they will end, but simply to remain disciplined while they unfold.

Instead, we continue to evaluate businesses one at a time. The portfolio that has emerged from this process looks different from where the market’s enthusiasm has concentrated this year. Meta and Tesla are participating directly in the AI transformation, but we own them for the same reasons we own every Rowan Street investment: exceptional businesses with durable competitive advantages, outstanding management, and long runways to reinvest capital at attractive rates. Their participation in AI reinforces our investment thesis—it is not the investment thesis. Shopify, Topicus, and Constellation currently face near-term uncertainty from the same narrative, but we believe each is considerably better positioned to benefit from AI than the market gives them credit for.

Rather than chasing that momentum, we remain comfortable owning businesses we understand, whose operating performance continues to improve, even if the market chooses—for now—to reward something else.

Over time, we believe business performance and stock performance tend to converge. Our job isn’t to predict when that convergence will occur. Our job is simply to continue owning exceptional businesses that become more valuable over time.

The Evolution of Rowan Street

Recently, I decided to reread every partnership letter we have published since our founding in 2015 to better understand how Rowan Street had evolved over the past eleven years.

Rowan Street’s first seven years (2015–2022) taught us that identifying exceptional businesses and capturing their extraordinary compounding are two entirely different skills. One of the most surprising discoveries from this analysis was that our long-term returns significantly understated the quality of our research. We had identified many of the businesses that went on to create extraordinary long-term wealth, yet during those first seven years our portfolio process often failed to capture the full economics of being right. We interrupted the compounding of proven winners, reallocated capital toward ideas with higher modeled expected returns, and allowed our forecasts to determine conviction before it had been earned through years of ownership and business execution. Most importantly, we underestimated how rare truly exceptional businesses are.

Those lessons crystallized in June 2022. At the depths of our largest drawdown, we published a letter titled The Next Chapter. It was a public declaration of how we intended to manage Rowan Street going forward—the businesses we were committed to owning, the capital allocation framework we would follow, and the principles that would guide our decisions. The Next Chapter wasn’t the beginning of a new philosophy. It was the moment Rowan Street publicly committed to living by the philosophy it had spent seven years developing.

Looking back four years later, perhaps the most encouraging conclusion from this analysis is not simply the returns we generated, but how consistently our actions reflected that philosophy. Whether Mr. Market rewarded or challenged our approach, Rowan Street remained remarkably consistent with the principles it committed to in 2022. Business quality—not modeled expected returns—became the primary driver of capital allocation. Conviction was earned through years of ownership and proven business execution. Successful investments were allowed to compound. The portfolio became a natural expression of those principles.

In hindsight, our greatest evolution wasn’t becoming better at finding exceptional businesses—it was becoming better at owning them.

As always, we remain deeply grateful for the trust our partners have placed in us. We continue to have the substantial majority of our own net worth invested alongside yours. That reflects our conviction — not just in the businesses we own today, but in the investment philosophy and decision-making framework we have spent more than a decade refining.

Best regards,

Alex and Joe

DISCLOSURES

The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot ensure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees.

Meta’s stock fell 8% the day after earnings while Google — growing at half the speed — rose 10% on the same day. The Wall Street Journal called the stock an investor trap. As long-term owners of Meta with real capital at stake, we reached a very different conclusion.

We have owned Meta since 2018. At the depth of the 2022 drawdown — when the stock had fallen 75% and the narrative was at the maximum point of pessimism — we published a piece asking whether a $750 billion decline in Meta’s market cap made sense. We argued it didn’t. Meta’s stock subsequently recovered more than 6x from those lows and became the biggest position in our portfolio.

Today we believe the market is making the same mistake again. Not identical — the circumstances are different, the fears are different, and the business is actually significantly stronger. But the core error is the same. The market is reading the cost and missing the compounding. And I think the evidence today is even more compelling than it was in 2022.

The Business Underneath the Noise

There is a version of the Meta story that gets almost no attention because it is not dramatic enough for financial media. It goes like this.

Since going public in 2012, Meta has grown revenue every single year without exception. From $3.7 billion in 2011 to $201 billion in 2025. That is a 33% compound annual growth rate sustained over fourteen years across multiple technology cycles, regulatory headwinds, a global pandemic, and a market narrative in 2022 that briefly convinced investors the company was in terminal decline — wiping $750 billion from its market capitalization — despite the underlying business revenue declining by just 1%. Gross margins have held in the 81-87% range for over a decade — a level of consistency that almost no business at this scale achieves.

Source: Meta Platforms SEC filings (10-K/10-Q). 2026E-2028E figures based on analyst consensus estimates. Prepared by Rowan Street Capital.

Note: Reality Labs operating losses shown in red. These are Meta’s VR/AR investments including the metaverse buildout.

We have been shareholders since 2018. Over that period the numbers tell a remarkably coherent story. Revenue has compounded at 20% annually. Operating profit at 19%. Cash flow from operations at 22%. Earnings per share at 18%. Four different measures of business performance, all compounding at nearly the same rate over eight years. That is not a coincidence. That is a business model working exactly as it was designed to.

The year that matters most for understanding Meta is 2022. That year the stock fell 75%. Operating margins collapsed from 40% to 25%. Expenses exploded. The metaverse was burning billions with no clear return. Apple’s privacy changes had disrupted the advertising model. Every narrative pointed toward a company in structural decline.

Zuckerberg’s response was decisive, swift and ruthless. He cut 21,000 jobs. He restructured the organization. He refocused the company on its core advertising business while maintaining the long term AI and infrastructure investments. He rebuilt Meta’s entire advertising infrastructure from the ground up — replacing the user-level tracking data lost to Apple’s iOS privacy changes with AI-powered predictive models that proved to be more effective. By 2023 margins had recovered to 35%. By 2024 they were back to 42%. By 2025 operating cash flow had reached $115 billion — more than double the 2022 level. The business that emerged from 2022 has not just recovered. It’s now structurally stronger, leaner, and more focused than the one that entered it.

This matters for how you read the current moment. In 2022 the fear was metaverse spending destroying shareholder value through misallocation of capital. Today the fear is almost identical — that AI capex represents the same mistake on a larger scale.

The difference today is that unlike 2022 — when the metaverse spending had no measurable near term return — the AI spending is producing immediate, specific, and compounding returns in the core business. We will get to that evidence shortly. But first it is worth sitting with these facts. You are looking at a business that has compounded at 20% annually for over a decade, survived an existential crisis and emerged stronger, generates $115 billion in annual operating cash flow, and trades at roughly 18x 2026 estimated earnings.

The AI Infrastructure Paradox

Every major technology company is spending enormous amounts of money on AI infrastructure right now. Amazon is spending $200 billion in 2026. Microsoft $190 billion. Google $185 billion. Meta $135 billion. The numbers are so large they have become almost abstract. Combined, these four companies will spend roughly $700 billion on AI infrastructure in a single year.

Source: Company guidance and analyst consensus estimates. Operating cash flow and capex figures represent 2026 full-year estimates. Free cash flow calculated as operating cash flow minus capex. Prepared by Rowan Street Capital.

But to understand why this matters you need to see where these businesses came from. For most of their history these were the most capital-light businesses ever created. Look at Meta in 2021 (see chart below) — $57 billion in operating cash flow against $18 billion in capex. Nearly $40 billion in free cash flow from a business that required relatively modest physical infrastructure compared to its revenues. Same story across Google and Microsoft through 2023. High margins, modest capex, enormous free cash flow. These were the businesses every investor dreamed of owning.

Then something changed. Starting in 2024 and accelerating dramatically into 2025 and 2026, the red bars on that chart start growing at a speed that is almost violent. In three years these businesses voluntarily transformed themselves from the most capital-efficient enterprises in history into some of the most capital-intensive. The golden era of capital-light technology is over. The question is who is spending wisely and who is not.

The market has made a very specific judgment on that question. Google rose 10% after its Q1 2026 earnings. Meta fell 8% on the same night. Both are primarily advertising businesses. Both are spending aggressively on AI infrastructure. Both reported strong revenue growth. The market rewarded one and punished the other.

The stated reason is straightforward. Google’s cloud business grew 63% in Q1 — a visible, tangible, third-party validated proof that AI infrastructure spending is converting into revenue. The market looked at that number and concluded the investment is working. It looked at Meta — which has no cloud business, no external customers, no third party revenue stream to point to — and concluded the returns are uncertain.

But look at what the chart below actually shows when you compare the two companies side by side. Google is projected to generate negative $55 billion in free cash flow in 2026 — spending $185 billion on infrastructure against $130 billion in operating cash flow. Meta is projected to be positive $2.4 billion despite spending $135 billion. By any conventional financial measure Google’s infrastructure bet is more aggressive, more leveraged, and more financially stressful than Meta’s. Yet the market rewarded Google and punished Meta.

Source: Company filings (Meta 10-K/10-Q, Alphabet 10-K/10-Q). 2026E figures based on company guidance and analyst consensus estimates. Chart prepared by Rowan Street Capital.

The market is not making a financial judgment. It is making a trust judgment. It trusts that Google’s cloud revenue proves the AI bet is working. It does not extend the same trust to Meta’s 33% revenue growth — the fastest in the entire group — as equivalent proof.

This is where the argument gets interesting. Because the absence of a cloud business at Meta is not a weakness, in our opinion. It is actually the source of Meta’s significant competitive advantage in the AI era — one that the market has completely failed to price.

Amazon, Microsoft and Google are building AI infrastructure and then selling access to it. Their capex is simultaneously a cost and a product. They build the data centers, buy the chips, and rent that compute to other companies through cloud platforms. Their return on investment is mediated through a market — cloud pricing, enterprise contracts, chip sales. As competition intensifies, as custom silicon challenges Nvidia’s dominance, the price of AI compute will fall. That benefits their customers. It compresses their margins.

Meta is doing something categorically different. Every dollar Meta spends on AI infrastructure goes directly into improving products that 3.5 billion people already use every day. There is no cloud business. There is no external customer. There is no market price risk on the output. Meta builds the infrastructure, the improvements flow immediately into Facebook, Instagram, WhatsApp and their advertising systems, and 100% of the return comes back to the core business.

Think of it this way. Amazon, Microsoft and Google are oil companies that drill for oil and operate gas stations. They produce the commodity and sell it at market prices. When AI compute becomes cheaper — and it will — their margins on that infrastructure compress.

Meta is a manufacturer that drills its own oil purely to power its own factories. They never sell a barrel externally. When compute prices fall because of oversupply and competition, Meta benefits as a pure consumer. Their input costs decline while their output — advertising revenue at 82% gross margins — continues to grow.

This distinction has a second dimension that makes it even more powerful. Meta open sourced their Llama foundation models. At first glance this looks like giving away the crown jewels. In practice it could be one of the most elegant strategic decisions in the AI era. Every researcher, every startup, every university building on Llama’s architecture generates insights, techniques and feedback that Meta can observe and incorporate into its own development. Google, Microsoft and Amazon cannot do this. Their proprietary models are their cloud product. They need to protect them because they sell access to them. Meta turned what looks like a weakness into a structural advantage. Open sourcing Llama was not charity. It was strategy.

And here is the compounding effect that the market is missing entirely. Meta’s AI improvements do not just make the feed more engaging or Reels more addictive. They directly improve advertising targeting precision in a measurable and immediate way. When an advertiser gets better ROI because Meta’s AI got smarter, they do not pocket the improvement. They reinvest it into more Meta ads. That creates a self-funding flywheel that none of the cloud companies have — because their AI improvements do not translate directly and immediately into revenue the way Meta’s do.

The cycle looks like this. Spend on AI infrastructure. Targeting improves. Advertiser ROI improves. Advertisers reinvest savings into more Meta ads. Revenue grows. More cash available for infrastructure. Repeat.

The market looked at Meta’s earnings and saw a company with no cloud revenue to validate its AI spending. What it missed was a company whose entire 33% revenue growth IS the validation — direct, immediate, and compounding every quarter.

We are not describing what might happen. We are describing what is already happening. And the earnings call that the market sold 8% on contained the most specific and compelling evidence yet that this flywheel is accelerating. Let’s look at those numbers.

What the Market Chose to Ignore

Four numbers from Meta’s Q1 2026 earnings call should have made headlines. They didn’t.

The value optimization suite — Meta’s AI system that helps advertisers find their highest value customers — crossed $20 billion in annual revenue run rate, more than doubling year over year. This is a single product line that essentially did not exist 18 months ago. It is now more than three times larger than Snap’s entire business and growing at 100% annually. It was built entirely on the AI infrastructure the market is penalizing.

The global average price per ad increased 12% while ad impressions grew 19% simultaneously. When both volume and price increase at the same time on a platform this size, you are not looking at a maturing business. You are looking at genuine pricing power driven entirely by AI improving advertiser returns.

Meta’s trillion parameter advertising model — frontier AI scale — is now making real time decisions in milliseconds across billions of daily ad auctions. The CFO reported this single model drove a 1.6% conversion rate improvement across Facebook and Instagram — and across a $200 billion annual advertising business, that represents an estimated several billion dollars in incremental advertiser value that advertisers historically reinvest back into Meta’s platform. Replicating this requires a frontier model, custom silicon, and twenty years of conversion data simultaneously. Only Google has all three. Meta just joined that exclusive club.

Business AI conversations on Meta’s messaging platforms reached 10 million per week — up from 1 million at the start of the year. Ten times growth in a single quarter. On a product that is currently free. When monetization begins — and the CFO confirmed it will — the conversion from free to paid on a product growing at this rate could be one of the most significant monetization events in Meta’s history.

Those four data points — a $20 billion new product doubling, pricing power accelerating, a moat that just got significantly wider, and a free product growing 10x — were all reported on the same earnings call that sent the stock down 8%.

The concerns about Meta are legitimate and deserve honest acknowledgment. The metaverse cost $83 billion and produced negligible returns. Zuckerberg controls the company with no checks on his capital allocation decisions. Regulatory and litigation risks are real and unquantifiable. Any serious investor must hold these risks simultaneously with the bull case.

But here is what we believe the market is getting wrong. It is applying the memory of the metaverse to a structurally different situation. The metaverse was a hardware bet on future consumer behavior that didn’t exist yet. The AI investment is improving products 3.5 billion people use every day with returns that are immediate, specific, and measurable every single quarter.

Shareholders are nervous about Zuckerberg because every once in a while he goes off on a journey and spends money almost like a hobbyist. His track record tells a very different story.

What we have witnessed over eight years is one of the most extraordinary examples of founder-led business building in the history of American enterprise. Zuckerberg has navigated multiple major platform transitions — each time the market doubted him.

He rebuilt Facebook from a desktop product into a mobile advertising machine. He acquired Instagram for $1 billion when the market called it absurd — most analysts today estimate it is worth between $400 and $500 billion, making it one of the greatest acquisitions in business history. He acquired WhatsApp for $19 billion when the market called it reckless — it now has over 3 billion users and its monetization has barely begun. When Stories emerged on Snapchat he copied it aggressively across every app in the family — and was widely mocked for the shameless imitation. Instagram Stories passed 200 million daily active users just nine months after launch, directly stunting Snapchat’s growth at a critical moment. When TikTok threatened to steal a generation of users he built Reels — every analyst said it was too late. It wasn’t. Each time the market called it too expensive, too late, too reckless or impossible. Each time it compounded into something extraordinary.

We don’t know exactly how the AI chapter ends. Nobody does. What we know is who is writing it. After watching Zuckerberg grow his college dorm room idea into a $1.5 trillion enterprise — proving the skeptics wrong at every turn — he has earned the benefit of the doubt.

The Valuation Paradox

Back in November 2022, at the depth of the drawdown, we wrote the following:

“Meta is estimated to make close to $120 billion in revenues this year. Gross profits are still around 80%. The core Family of Apps business generated $48 billion in operating profits over the past 12 months, and the entire market cap is currently $240 billion — 5x core operating profits. Is Zuck just burning through piles of cash? Given his incredible track record, his unique ability to see where the world and technology is headed over the next 10-15 years and to execute against his vision, we would not bet against him.”

Three and a half years later, here is where things stand:

Meta is estimated to generate around $253 billion in revenues in 2026. Gross margins remain at 82%. The core Family of Apps business generated $108 billion in operating profits — more than double what it was generating when we wrote the 2022 piece. Today’s market cap is approximately $1.5 trillion — 6.3x where it stood at the bottom of that drawdown. So the stock has re-rated significantly. Yet it still trades at only 13.9x core operating profits. Operating cash flow is estimated at $136 billion this year — an 11x market cap to operating cash flow multiple.

Now look at the growth picture relative to Google — the most natural comparison given both are primarily advertising businesses competing for the same dollars.

Meta just reported 33% revenue growth in their latest quarter compared to Google’s 22%. Meta has been growing substantially faster than Google since 2023. And yet look at what Mr. Market thinks of that:

Meta currently trades at 11 times forward operating cash flow. Google trades at 22 times. A 2x valuation gap between two advertising businesses where the cheaper one is growing 50% faster than the expensive one.

Mr. Market seems to have a lot more trust in Pichai’s ability to reinvest cash flows than in Zuck’s. Is Zuck just burning through piles of cash? We asked that question in 2022. The stock subsequently re-rated itself over 6x from those lows. The evidence today is even more compelling that the answer is No. There is a good probability that Mr. Market is making the same misjudgment it has made before at critical points in the company’s history.

Today the setup is different from 2022. The stock is not down 75%. The business is not in crisis. The narrative is not one of existential decline. The setup today is subtler and in some ways more interesting — the fastest growing company in the Magnificent 7 ex-Nvidia, at the lowest valuation, penalized specifically and selectively for investing in AI infrastructure that is already producing immediate measurable returns, while the market rewards slower growing peers spending more aggressively on the same infrastructure.

The market is not making a financial mistake. It is making a judgment about its founder-CEO. It is looking at Zuckerberg and deciding — again — that it cannot trust how he is allocating shareholder capital.

We continue to hold Meta as our largest position. Not because we are certain about every bet Zuckerberg is making. But because we are certain about something more important — the quality of the people making them. In a lifetime of investing, the combination of an excellent business and a truly extraordinary founder-operator running it is rare. The opportunity to own them at a discount is even rarer. When we find that combination — our philosophy has always been the same. Buy right. And hold on.

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About Rowan Street Capital

Rowan Street Capital is a long-term, concentrated investment partnership founded in 2015 by Alex Kopel and Joe Maas. We are patient owners of a carefully selected group of exceptional businesses, investing alongside founder-operators and management teams who build durable value over time. We charge no fixed management fees — our compensation is tied directly to the performance of our partners’ capital.

If our way of thinking resonates with you, we invite you to follow our work on Substack and explore our full investment philosophy at rowanstreet.com.

DISCLOSURES

The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot ensure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees.

Tesla Cortex 2 — AI Training Cluster. This is where the moat is being built.

We went through Tesla’s Q1 2026 earnings call. A lot of the coverage focused on the HW3 FSD situation — 4 million vehicles sold between 2019 and 2024 with promises of full self-driving capability that, Musk now confirmed, those vehicles simply cannot deliver. The hardware lacks the memory bandwidth. A costly swap involving both the computer and cameras is required. No timeline, no pricing, and the custom retrofit chip doesn’t even exist yet. Class action exposure is real.

That’s a legitimate near-term risk and we don’t dismiss it.

But buried deeper in the transcript was something more revealing. When asked whether V14.3 was the final piece needed for large-scale unsupervised FSD, Musk said essentially yes — and Ashok noted the Robotaxi fleet has recorded zero incidents to date. But Musk was equally direct about what comes next: it simply wouldn’t make sense to deploy at very large scale when they already know major architectural improvements are in the pipeline that will significantly improve both safety and capability. V15 is not a regulatory hurdle Tesla needs to clear. It is a self-imposed standard.

Read that carefully. Tesla has a version of FSD working well enough to deploy commercially today — already running unsupervised in three cities. But they’re consciously choosing not to go to massive scale yet because a better version is coming.

That’s responsible. It’s also the moment we started thinking harder about who, exactly, is paying for V15 to exist.

The Customers Are the Product

Here is the thesis in its simplest form:

When a customer buys a Tesla and pays $10,000–$15,000 for Full Self-Driving, they are not just buying a software feature. They are, knowingly or not, enrolling themselves as a data generation node in the world’s largest autonomous driving training program. Every mile they drive on FSD — every near-miss, every unusual intersection, every moment the system hesitates and the driver corrects — flows back to Tesla’s servers and into the neural network that becomes the next version of FSD.

The customers bearing the cost of building this moat are the same people generating the data that makes the moat deeper. They are simultaneously Tesla’s revenue source and Tesla’s R&D infrastructure.

This is not an accident. It is the strategy.

Tesla has approximately 4 million FSD-enabled vehicles on the road today. The fleet is collectively driving an estimated 30–40 million miles on FSD every single day. Tesla is approaching 10 billion cumulative miles of FSD training data. For context, Waymo — the category leader in fully driverless commercial operation after 17 years of work — has approximately 200 million fully autonomous miles. Tesla’s customers have generated roughly 50 times more training data, and they paid Tesla to do it.

We’ve seen this dynamic before. It reminded us of something.

The Meta Parallel

We’ve been investors in Meta since 2018 — it has been our largest holding for several years and has compounded at over 19% annually since our initial purchase. We stayed through the controversies, the regulatory hearings, the metaverse skepticism, and the 2022 collapse when the stock lost more than 75% of its value and some of the most respected investors in the world were selling. We didn’t. The reason we got involved — and stayed involved — was a simple observation: Meta had built a network effect that compounded in their favor every single day.

Every new user who joined Facebook or Instagram made the platform more valuable to every existing user. And crucially, every new user made it harder for a competitor to replicate the network. The moat didn’t just exist — it widened automatically as the business grew. By the time anyone understood the magnitude of what Meta had built, it was effectively too late to displace it.

What Tesla has built is the same dynamic applied to AI training.

Every Tesla sold adds another data-generating node to the network. Every mile driven makes the training dataset richer and more diverse. Every edge case encountered in Topeka or Taipei that the system learns from is an edge case no competitor has seen. You cannot buy, simulate, or shortcut your way to 10 billion miles of real-world autonomous driving data across every climate, road type, and driving culture on earth.

The moat doesn’t just exist. It widens by approximately 30–40 million miles every single day. Meta’s users give their data in exchange for a free service. Tesla’s customers pay $10,000–$15,000 for the privilege of generating it. If Meta’s model is elegant, Tesla’s is something else entirely.

Why the Moat Is Deeper Than the Market May Realize

Meta deploys to over three billion users and something breaks. Zuckerberg sees the data the next morning, a fix ships within days, and the iteration loop closes quickly. The product gets better through public testing and that is not just acceptable — it is the strategy. Move fast. Ship. Learn. Repeat. The progress is visible every quarter in engagement metrics, daily active users, and advertising revenue. The cost of a bad deployment is categorically different from Tesla’s.

Tesla’s failure mode is a human being dying on a public road.

That single difference changes everything about the development cycle — and explains almost entirely why a company with 10 billion miles of training data, its own chips, its own supercomputers, and a functioning unsupervised FSD system already running in three cities has yet to produce the evidence that justifies the market’s ambition for it.

Tesla cannot use its customers as beta testers the way every software company does. It cannot ship V15 to a million cars, watch what breaks, and patch it next week. Every improvement has to be validated internally — in simulation, across a dedicated QA fleet spread across the entire United States, stress-tested against every scenario the system might encounter — before it ever touches a paying passenger. The iteration loop that takes Meta hours takes Tesla months or longer.

Musk made this explicit on the Q1 call in a moment that deserves more attention than it received. When asked about the key safety metrics gating Robotaxi expansion, he clarified that the primary bottlenecks are not safety issues in the traditional sense at all. They are what he called convenience issues — the car getting “scared” to cross a railroad track, getting stuck at a light that never changes, or circling a block in an infinite loop because construction is blocking a turn. Twelve Tesla Robotaxis in Austin got stuck waiting behind a Waymo that had crashed into a bus. The bus wasn’t moving. The Robotaxis didn’t know what to do.

In any other software product, that bug gets reported by users, triaged by engineers, and fixed in the next deploy. For Tesla, that edge case has to be caught in internal testing before the car is ever in that situation with a paying passenger — because the consequences of public failure are not a one-star review. They are a regulatory halt, a congressional investigation, and potentially years of setback to the entire autonomous vehicle industry.

This creates a profound asymmetry between the speed at which Tesla’s capabilities are actually advancing and the speed at which that advancement is visible to outside observers. The internal progress is continuous. The training data accumulates daily. V14.3 works. V15 is in development with major architectural improvements. Terafab is under construction. AI5 has taped out. But none of it shows up in the revenue line until the safety validation threshold is crossed and deployment happens at scale. So the market sees a company that keeps promising a future that keeps being one version away — when the more accurate description is a company that is genuinely advancing its capabilities rapidly but is structurally prevented from demonstrating that progress publicly until it meets a safety bar that has no equivalent in software.

There is a deeper irony here. The very constraint that makes Tesla’s timeline so frustrating to investors — the inability to iterate publicly, the necessity of getting it right before deploying it widely — is also part of what makes the moat so durable once it is established. Any competitor that tries to shortcut the safety validation process risks the kind of catastrophic public failure that ended Cruise in 2023. The bar is so high, and the reputational and regulatory consequences of clearing it imperfectly so severe, that only companies with extraordinary data scale, deep pockets, and genuine patience can stay in the game long enough to cross it.

This is, we think, the central reason the moat is likely underpriced. It is not that investors don’t believe in autonomous vehicles. It is that the infrastructure behind Tesla’s progress — the training data compounding daily, the chip architecture evolving, Terafab being built — is entirely invisible, while the challenges — missed timelines, HW3 obligations, hardware obsolescence cycles — surface publicly through earnings releases, regulatory filings, litigation, and analyst scrutiny.

The moat widens in silence. Musk talks up the vision on every earnings call. But the architecture being assembled underneath that vision is what the market has yet to fully price, in our view.

Why Competitors Cannot Replicate This

The question we always ask about a moat is: what would it take for a well-funded competitor to close the gap?

For Tesla’s data flywheel, the answer is genuinely daunting. To replicate Tesla’s training pipeline a competitor would need to simultaneously sell millions of vehicles, convince millions of customers to pay for an autonomous driving package, deploy that fleet across diverse global geographies, and build the AI infrastructure to process it — all while Tesla’s existing fleet continues to widen the gap daily.

Waymo has 3,000 vehicles. GM’s Cruise collapsed after a serious accident in 2023. Ford and VW shut down Argo AI. Every major automaker that attempted to build this internally has failed, partnered, or retreated.

The most credible competitive threat comes from China — and specifically from Xpeng, which deserves more attention than it typically receives in Western investment analysis. Xpeng has built a vision-based, end-to-end neural network approach architecturally similar to Tesla’s, trained it on Chinese road data at meaningful scale, developed its own proprietary AI chip, and as of early 2026 is producing results that have surprised even skeptical Western analysts. BYD — despite being the world’s largest EV maker — is focused on basic driver assistance rather than true autonomy. Huawei is investing heavily but relies on expensive LiDAR-based hardware and fragmented data collection across partner automakers rather than a unified fleet. The structural constraint for all three remains the same: their data is overwhelmingly Chinese, and the regulatory and cultural barriers to deploying globally mean Tesla’s Western market moat remains largely unthreatened for now. But Xpeng is building something real — and watching how quickly they close the gap on Tesla in China is the most important competitive data point to monitor.

The one theoretical path to leapfrogging Tesla’s data moat would be a breakthrough in synthetic data generation — training AI on simulated rather than real-world miles so effectively that real-world data becomes less important. This is theoretically possible. But nobody has proven it works at the level required for unsupervised FSD. And Tesla itself uses simulation heavily alongside real-world data, meaning they would benefit from that breakthrough too.

The Cost Structure That Changes Everything

There is a second dimension to Tesla’s moat that we think is equally underappreciated: the unit economics of the Robotaxi business, when it scales, will be structurally difficult for Waymo to compete with.

Waymo’s model requires expensive purpose-built vehicles — their Jaguar I-Pace fleet costs roughly $70,000 per car before adding the sensor suite. LiDAR, radar, extensive pre-mapping of every new city, remote operators monitoring the fleet, and fleet management partnerships in each market. Their current operating cost runs approximately $1.36–$1.43 per mile.

Tesla’s Cybercab is targeting under $30,000 with no LiDAR, no pre-mapping requirement, and full vertical integration across chip design, software, manufacturing, and the service network. Current real-world data already shows Tesla’s Robotaxi operating at roughly $0.81 per mile — with a safety monitor still present. Fully unsupervised, credible estimates put Tesla’s cost somewhere between $0.20 and $0.40 per mile at scale.

At $0.25 per mile, personal car ownership becomes economically irrational for a significant portion of the population. That is not a taxi market or a ride-hailing market. That is a complete restructuring of how urban transportation works globally. Waymo’s cost structure, even with their new Zeekr RT platform, does not credibly get there.

Terafab: From Silicon to Street

To understand Terafab properly, you have to understand something about how Tesla became Tesla.

Vertical integration was never the original plan. When Musk set out to build electric cars, the intent was to do what every other automaker does — design the vehicle and outsource the components. Buy batteries from suppliers. Source electronics from vendors. Contract manufacturing where possible. That’s the established playbook and it keeps capital requirements manageable.

It didn’t work. Not because the suppliers were unwilling, but because they couldn’t meet Tesla’s standards for quality, pace, and first-principles engineering at the scale Tesla needed. Time and again, Tesla would go to an outside supplier for a critical component — seats, battery management systems, power electronics, body panels — and find that the supplier’s timeline was too slow, their quality inconsistent, or their willingness to iterate on design simply incompatible with how Tesla operated. So Tesla brought it in-house. Not as a grand strategy. As a repeated, pragmatic response to the same problem: nobody outside can do what we need, at the speed we need it, the way we need it done.

The result, after 20 years of those decisions compounding, is the most vertically integrated major manufacturer in the automotive industry. Tesla designs its own chips, writes its own software, operates its own manufacturing lines, runs its own service centers, owns its own charging network, and trains its own AI. Each of those capabilities started as a frustration with an outside vendor and ended as a competitive advantage.

Terafab is that same story playing out one more time — but at a scale that dwarfs everything that came before it.

When a Barclays analyst asked on the Q1 call whether Terafab was really about generating leverage over chip suppliers — essentially getting better pricing by threatening to go in-house — Musk’s answer was characteristically direct: no. This is not a negotiating tactic. It is survival.

Tesla looks at its scaling roadmap for FSD, Cybercab, and Optimus and concludes that the entire global chip industry, as currently constituted, cannot produce enough chips fast enough to support where Tesla needs to go. Not at any price. The industry’s growth in logic chips is insufficient. In memory — the specific bottleneck that determines how capable AI models can become, the same memory bandwidth constraint that made HW3 obsolete — the gap is even more acute. Tesla anticipates hitting a hard supply ceiling within three to four years if it doesn’t manufacture chips itself.

That’s the primary motivation. Not economics. Not leverage. Supply survival.

The memory point deserves particular emphasis because it connects directly to the thread running through this entire earnings call. Why can’t HW3 do unsupervised FSD? Memory bandwidth. Why does AI advancement keep requiring new hardware generations? Memory bandwidth. The entire trajectory of autonomous driving improvement is fundamentally constrained by how fast AI chips can move data in and out of memory. When Musk says the industry isn’t keeping up on memory even more than on logic, he is identifying the precise bottleneck that determines how good FSD can get and how quickly. Controlling your own memory fabrication is therefore not peripheral to the FSD roadmap. It is central to it.

Terafab is a $20–25 billion joint venture between Tesla, SpaceX, and xAI — officially launched in March 2026 — designed to become the largest semiconductor fabrication facility ever built, targeting one terawatt of AI compute annually. At full capacity, that would represent roughly 70% of the current global output of TSMC, the world’s dominant chip foundry.

But scale alone is not the point. The architecture is.

Most chip production on earth separates the stages across multiple sites and companies. You design the chip in one place, create the lithography masks in another, fabricate the wafers at a foundry, package them elsewhere, and test them somewhere else entirely. Each handoff takes weeks. A full iteration cycle — design a chip, manufacture it, test it, find the problems, redesign — takes months. Sometimes longer.

Terafab puts every single one of those stages under one roof. Chip design. Mask creation. Logic fabrication. Memory production. Advanced packaging. Testing. All of it, in one building, on the North Campus of Giga Texas in Austin. As Musk noted on the call, and as independent reporting confirms, this capability does not currently exist anywhere else in the world.

What that means in practice is a compression of the chip iteration cycle from months to weeks or days. Tesla can design a new chip architecture in the morning, have wafers running by the afternoon, test the results, and revise the design — all without shipping anything anywhere. For a company whose competitive advantage depends on advancing AI faster than anyone else, this is not an incremental improvement. It is a different category of capability entirely.

And Musk went further. He mentioned almost in passing that Tesla has ideas for “maybe radically better AI chips” — new physics they want to test, long-shot research that a conventional external fab relationship would make nearly impossible to pursue. If even one of those long shots pays off — better memory bandwidth, lower power consumption, faster inference — that improvement stays proprietary inside Tesla’s stack. It doesn’t get fabbed at TSMC where other customers eventually access similar process improvements. It flows directly and exclusively into FSD, Cybercab, and Optimus. The iteration speed advantage and the potential for proprietary breakthroughs reinforce each other.

Tesla is partnering with Intel on this, using their 14A process — a 2-nanometer class node that represents the current frontier of semiconductor manufacturing. The partnership reduces dependence on TSMC and the geopolitical concentration risk that dependence carries.

Today the moat is: data scale plus cost structure plus vertical integration in vehicles and software. With Terafab, the moat extends to the silicon itself. Tesla would be designing its own chips, fabricating them in its own facility, training its own AI on its own supercomputers, deploying that AI in its own vehicles, operating its own robotaxi network, and iterating on all of it faster than any external dependency would allow.

There is one important caveat worth stating plainly. Musk acknowledged on the earnings call that the intercompany structure — Tesla doing the research fab, SpaceX handling the initial large-scale facility — creates genuine governance complexity. Any intercompany arrangement requires independent director review at both Tesla and SpaceX to ensure each company’s shareholders are being served fairly. Early reporting suggests approximately 80% of Terafab’s projected compute output is directed toward space applications for SpaceX, with only 20% for terrestrial uses like FSD and Optimus. That ratio deserves scrutiny. Tesla shareholders should watch carefully to ensure the capital Tesla is contributing to this joint venture generates returns that flow back to Tesla — not primarily to SpaceX.

That governance question is real and unresolved. But it doesn’t change the fundamental observation: if Terafab executes as described, Tesla’s vertical integration story stops being about cars and software and becomes something far larger — a company that controls its own AI hardware destiny from silicon to street. And unlike most of Tesla’s ambitious announcements, this one has a clear historical precedent. Every time Tesla has been forced by outside limitations to build something itself, it has ended up owning a capability its competitors have to buy. Terafab looks like the largest version of that pattern yet.

The Risks — And We Take Them Seriously

Intellectual honesty requires us to present the other side with equal weight, because the risks here are real.

Execution risk is the most significant: Tesla has been promising unsupervised FSD at scale since 2016. It is now 2026 and they are running dozens of cars in three cities. The pattern of promises followed by timeline slippage is undeniable and any investment thesis built on Tesla’s autonomous future must grapple honestly with this track record.

The hardware obsolescence cycle is a structural problem: As we analyzed from this earnings call, the same dynamic that stranded HW3 owners will likely repeat. AI4.5 is already shipping in new Model Ys. AI4 Plus is announced for 2027. Today’s Cybercab buyers are purchasing hardware that is already one generation behind. The conflict between Tesla’s AI advancement roadmap and its obligations to existing customers does not resolve neatly.

The customer trust deficit is real and compounding: Approximately 4 million HW3 owners were told definitively that their hardware would support full self-driving. It will not. Class action litigation is likely. The reputational cost of that broken promise, at scale, has not yet been fully absorbed.

Regulatory risk remains the wildcard: Unsupervised FSD has so far been deployed only in relatively manageable environments — Austin, Dallas, Houston. It has not yet been tested without a safety driver in the dense, unpredictable environments where autonomous vehicles face their hardest challenges — New York City, Chicago, adverse weather conditions at scale. A serious incident during the expansion phase could trigger regulatory responses that set the entire timeline back by years.

Musk dependency: Every layer of the moat we’ve described in this essay — the data flywheel, the iteration discipline, the Terafab ambition, the willingness to build what suppliers cannot — flows from a single founder’s vision and relentless execution. Elon Musk is not just the CEO of Tesla. He is the organizational force that has driven every major vertical integration decision, every hardware generation, every audacious bet. The risk is not that Musk is a distraction — it is that he is irreplaceable. No succession plan exists for the kind of first-principles thinking that built this moat. That is perhaps the biggest concentration risk in any large-cap company in the world today.

What We’re Watching

The key milestones we’re tracking closely:

• V15’s arrival and what “major architectural improvements” actually means in practice. This is now the gating software factor for large-scale Robotaxi deployment and no timeline was given on the call.

• The HW3 retrofit program — specifically whether Tesla announces a credible, affordable path for the 4 million affected owners or whether this becomes a prolonged legal and reputational problem.

• Cybercab production ramp. Getting from “hundreds per week” to the tens of thousands needed to meaningfully impact transportation economics is a manufacturing challenge Tesla has navigated before — but not with a purpose-built robotaxi on a new platform.

• Regulatory expansion beyond Texas. How quickly Tesla gets unsupervised FSD approved in states beyond Texas will determine whether the “dozen states by year end” target Musk mentioned is achievable.

The Bottom Line

There are no guarantees that Tesla will execute against its very audacious goals. The risks are real, the timeline history is humbling, and the competitive and regulatory landscape is genuinely difficult. Tesla already trades at a multiple that reflects enormous ambition — the market is not blind to the autonomous future.

What we are saying is that the architecture behind that future may be more defensible than even the current valuation implies. The data flywheel compounding by 30–40 million miles daily. The iteration asymmetry that builds capability internally at a pace that hardly shows up in quarterly results until it suddenly does. The vertical integration pattern — now extending to chip fabrication — that has turned every external frustration into a structural advantage that competitors cannot easily replicate.

Here is what makes this unusual: the people generating that data are doing so willingly. Tesla owners genuinely love their cars. FSD, for all its imperfections, remains the most capable assisted driving system available anywhere. Every mile driven is both a genuine product experience and a contribution to a training dataset that no competitor can replicate. That simultaneity — of value delivered and moat built — is what makes the architecture so durable.

We established a core position in Tesla in the first half of 2025 during maximum pessimism, as we laid out in our Q3 2025 letter. The pessimism has partially lifted. But the deeper thesis — data scale, cost structure, vertical integration, network effects, and now semiconductor fabrication — has only grown stronger. The moat is not yet visible in the numbers. It is visible in the architecture.

The quarterly earnings call is where investors often focus on the next couple of quarters. The training servers are where the long-term moat is actually being built. That gap between what is currently visible and what is really cooking under the hood is, in our view, where the investment opportunity lives.

About Rowan Street Capital

Rowan Street Capital is a long-term, concentrated investment partnership founded in 2015 by Alex Kopel and Joe Maas. We are patient owners of a carefully selected group of exceptional businesses, investing alongside founder-operators and management teams who build durable value over time. We charge no fixed management fees — our compensation is tied directly to the performance of our partners’ capital.

If our way of thinking resonates with you, we invite you to follow our work on Substack and explore our full investment philosophy at rowanstreet.com.

DISCLOSURES

The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot ensure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees.

The first quarter of 2026 gave investors plenty to worry about. Rising tensions in the Middle East pushed oil prices higher, inflation concerns resurfaced, and the long-anticipated pivot to lower interest rates continues to be postponed. Markets, never short on imagination, have begun spinning familiar narratives: that expensive money punishes growth, that AI’s promises may exceed its near-term returns, and that the safer bet lies in energy, cyclicals, and businesses whose cash flows arrive sooner rather than later. There is also a growing fear that AI itself may disrupt entire categories of existing software businesses — rendering yesterday’s winners obsolete overnight.

We will not pretend these concerns are frivolous. They are not. When the cost of capital rises, the arithmetic of investing genuinely changes — a dollar earned a decade from now is worth less today than it was in a world of cheap money. That is not opinion; it is math. And we have always believed in taking math seriously.

But here is what we have also learned, after watching markets swing from greed to panic across many cycles: the headlines that feel most urgent are rarely the ones that determine long-term outcomes. The businesses that compound wealth over decades do so not because they were spared from difficult environments, but because they were built to endure them. We have spent the past decade building a portfolio of exactly that kind.

None of what we are seeing today is new. Different costumes, same play.

Performance in Context

During the first quarter, Rowan Street declined 19.8%, compared to a 4.3% decline for the S&P 500. That is not a result we enjoy reporting. At the same time, it reflects the more concentrated approach we take and is not unusual for portfolios built around a smaller number of high-conviction investments.

We invest in a focused group of businesses that we believe can compound value at attractive rates over long periods of time. In the short term, their stock prices can be more volatile—particularly in environments like the one we are experiencing today, where interest rates are higher and investor focus has shifted toward businesses with nearer-term cash flows.

Rowan Street is designed for long-term compounding, not for minimizing short-term volatility or closely tracking a benchmark. As a result, returns can differ meaningfully from year to year.

We have seen this before.

In early 2022, we went through a similar period where stock prices declined sharply, even as the underlying businesses continued to perform well. At the time, we wrote that the portfolio was, in many ways, in one of the strongest positions in our history despite the decline in stock prices.

That did not feel obvious at the time. What followed was a period where business performance ultimately reasserted itself. The fund returned +102.6% (net) in 2023, +56.6% in 2024, and +11.1% in 2025.

As Benjamin Graham observed:

"In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

A Post-Quarter Update

We are writing this letter in mid-April, approximately two weeks after quarter-end. Since March 31, markets have moved sharply — and our portfolio has recovered approximately half of the first quarter decline. Based on our internal estimates as of April 17, year-to-date performance stands at approximately -10%, compared to the official quarter-end figure of -19.8%. We note that this mid-month figure is an internal estimate only, has not been verified by our fund administrator, and reflects only a partial month.

We share this not to suggest the difficult period is behind us — it may not be. We share it because it illustrates precisely the point we are making throughout this letter. The fundamentals of the businesses we own have not changed. Their competitive positions, earnings power, and long-term prospects remain intact, in our view. What changed was the price multiple. This is what long-term ownership of exceptional businesses actually looks like. Price and value diverge. Sometimes dramatically. The investors who benefit are those with the temperament to remain focused on the underlying businesses, not the day-to-day movements of their stock prices.

Volatility is the Price of Admission

The table below shows the annual returns of our largest holdings by portfolio weight as of March 31, 2026 and illustrates a simple reality of long-term investing: even exceptional businesses experience significant volatility. We have included an April 17 column to reflect the meaningful recovery in our portfolio since quarter-end, as discussed in the Performance section above. The figures reflect annual stock price returns and do not represent Rowan Street Capital fund performance or returns achieved by the fund on these positions.

The April 17 column tells its own story — and it is the same story this letter is built around. This is what long-term ownership actually looks like in practice. Not a smooth upward line — but a recurring series of gains, losses, and tests of conviction. Drawdowns of 30%, 50%, even 75% are not unusual. They are a recurring feature of owning exceptional businesses — not anomalies.

Everyone describes themselves as a long-term investor. Very few are willing to endure what that actually looks like. Volatility is the price of admission.

The charts that follow bring this pattern to life across three of our largest holdings — Meta Platforms, Tesla, and Shopify. Different businesses, different drawdowns, same lesson.

Meta Platforms (META)

Meta has delivered a cumulative return of approximately 1,300% since its IPO, or about 21% annually. The path to those returns, however, has been anything but smooth.

Over the past decade, the stock has experienced numerous drawdowns of 30% or more, several declines of 50% or more, and, most notably, a decline of nearly 80% in 2022.

These periods were not isolated events — they were a recurring feature of owning this business. And yet for those who remained focused on the underlying fundamentals, the long-term outcome has been exceptional.

We believe today represents one of the most compelling opportunities in Meta we have seen since 2022. Please read our full analysis below — including our views on the AI spending debate, the recent legal setbacks, and why we believe the market may be repeating a familiar mistake.

Tesla (TSLA)

Tesla provides an even more striking example—not just of volatility, but of how disproportionate long-term outcomes can be relative to the experience along the way.

Since its IPO in 2010, the stock has delivered a cumulative return of approximately 22,000%, or about 41% annually. Looking at that result today, the path can appear almost inevitable. In reality, it was anything but.

There were multiple periods along the way where the stock declined sharply—on numerous occasions by more than 50%, and once by over 70%—often accompanied by shifting narratives around the business. At different points, the concerns ranged from questions about the company’s survival, to valuation, to increasing competition, founder behavior and execution risk.

Each of those moments felt uncertain in real time. And yet, for investors who were able to remain focused on the long-term trajectory of the business, the outcome has been extraordinary.

The biggest winners rarely feel comfortable to own.

While Tesla has demonstrated this pattern over many years, our ownership of the business is still relatively recent.

We outlined our investment thesis in detail in our Q3 2025 letter, and our view remains unchanged. From here, our role is not to predict short-term movements, but to remain disciplined and allow the long-term economics of the business to play out.

Shopify (SHOP)

Shopify has been an exceptional business over time, compounding at over 40% annually since its IPO.

The path to those returns, however, has been far from smooth, including several sharp drawdowns and a decline of more than 80% in 2022.

We experienced this firsthand. After initiating our position in early 2022, the stock declined by an additional ~50%. We believed the drawdown reflected multiple compression, not fundamental deterioration. The business continued to grow revenues, expand its merchant ecosystem, and strengthen its competitive position. The price was broken. The company was not.

It did not feel good. The best opportunities rarely do.

What followed was a long and uncomfortable period of patience before payoff. The stock rebounded 124% in 2023 — and yet we were still underwater on our investment. It was not until 2024 — when Shopify generated over $1 billion in operating profit for the first time and the stock gained another 37% — that we finally got our capital back and began generating real returns. The stock then rose 51% in 2025, making it our best performer of the year.

Three years of patience. Three years of watching the business execute while the stock tested our conviction repeatedly.

More recently the stock has again declined meaningfully — down 26% at quarter-end, though it has since recovered to approximately -17% as of mid-April. There is nothing unusual about that. It is the same pattern, playing out again.

Shopify is a clear example of why patience — especially through periods of valuation compression — is often required before fundamentals are fully reflected in stock prices. In our experience, the returns in businesses like Shopify are earned by those willing to endure periods when stock prices and business performance temporarily move in opposite directions.

Underlying Business Performance

Despite the recent decline in stock prices, the underlying businesses we own continue to perform well. Based on current estimates, our portfolio companies are expected to grow revenues at approximately 18% annually and earnings at approximately 21% annually over the next several years. These figures represent a weighted average across a group of businesses operating in different industries and geographies.

In our experience, periods like this — when price and value diverge — have consistently provided the most attractive investment opportunities.

In our Q2 2025 letter, we wrote that our edge does not come from predicting short-term market movements, but from our willingness to own a concentrated group of high-quality businesses and remain focused on their long-term compounding potential.

That principle is far easier to articulate when markets are rising than when they are declining. Periods like the one we are experiencing today are when that discipline is tested — and, in our view, when it matters most.

Portfolio Update: Constellation Software

During the quarter, we initiated a position in Constellation Software (TSE: CSU), funded by the sale of the remainder of our Spotify position. Constellation is one of the most exceptional capital allocation platforms in the public markets — a company that has compounded shareholder capital at approximately 28% annually since its 2006 IPO by systematically acquiring and operating mission-critical vertical market software businesses. The stock has recently declined approximately 50% from its highs, creating what we believe is a rare entry point into a business of this quality. For those interested in a detailed discussion of our investment thesis — including our views on the AI disruption narrative and the recent leadership transition — we have published a full write-up on our Substack.

The Opportunity Today

We want to be direct with our partners and with anyone considering investing alongside us for the first time.

We have been here before — not just as observers, but as participants with real stakes. In 2021-2022, when our portfolio declined sharply we remained focused on the underlying businesses and their long-term prospects. We wrote at the time that we believed the portfolio was in one of the strongest positions in its history. Few wanted to hear it. Even fewer wanted to invest. What followed was a cumulative net return of approximately +252% over the subsequent three-year period (2023–2025).

We are not promising a repeat. No honest investor can make that claim.

But here is what we can say with conviction: the businesses we own today are stronger than they were in 2022. Their competitive positions are deeper, their earnings power is greater, and their long-term opportunities are larger. In many ways, we believe this is the strongest and most focused portfolio we have built since our inception in 2015 — a small group of exceptional businesses that have each been tested through adversity and emerged with their competitive positions intact or strengthened.

And yet their stock prices have declined meaningfully from recent highs. In our view, the gap between what these businesses are worth and what the market is willing to pay for them today is as wide as it has been since that period.

We have invested a significant majority of our personal net worth alongside yours. We earn nothing unless our partners make money. That is not a marketing line — it is the structure we chose deliberately on day one, because we believe it is the only honest way to manage other people’s capital.

Periods like this are never comfortable. They were not comfortable in 2022, and they are not comfortable today. But in our eleven years of managing capital through euphoria and despair, one lesson has proven itself repeatedly: it is precisely in these moments — when prices are low, sentiment is poor, and patience feels unrewarded — that the most important long-term returns are made.

To our existing partners — thank you for your continued trust and patience. We have been here before, and we remain as convicted as ever in the businesses we own together. If your circumstances allow, we believe adding to your investment at current levels represents one of the more compelling opportunities we have seen since 2022.

To those considering investing alongside us for the first time — if this way of thinking resonates with you, we would welcome the opportunity to partner over the long term.

Best regards,

Alex and Joe

About Rowan Street Capital

Rowan Street Capital is a long-term, concentrated investment partnership founded in 2015 by Alex Kopel and Joe Maas. We are patient owners of a carefully selected group of exceptional businesses, investing alongside founder-operators and management teams who build durable value over time. We charge no fixed management fees — our compensation is tied directly to the performance of our partners’ capital.

If our way of thinking resonates with you, we invite you to follow our work on Substack and explore our full investment philosophy at rowanstreet.com.

DISCLOSURES

The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot ensure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees.

During the quarter, we initiated a position in Constellation Software (TSE:CSU). This decision reflects our continued effort to allocate capital toward what we believe are the highest-quality long-term compounders available to us.

We have been shareholders of Topicus (CVE:TOI), a spin-off from Constellation Software, since 2021. Over this period, we have been highly impressed with its execution, capital allocation discipline, and ability to compound value through the acquisition of vertical market software (VMS) businesses.

Our familiarity with Topicus has provided us with a deeper understanding of the broader Constellation ecosystem—its decentralized operating model, disciplined approach to capital allocation, and the durability of its business model. In many ways, we view our investments in Constellation Software and Topicus as part of the same underlying system, sharing a common philosophy and approach to long-term value creation.

A Business Built to Compound

Constellation operates a simple but highly effective model. The company acquires small, mission-critical software businesses that serve specific industries—commonly referred to as vertical market software companies. These businesses provide essential systems that customers rely on to run their daily operations. While the cost of the software is relatively small, its importance is high, resulting in low customer churn and highly recurring revenues.

These markets are often too small to attract meaningful competition, yet large enough to support attractive economics. As a result, many of these businesses enjoy durable competitive positions within their niches.

What makes Constellation exceptional, however, is not just what it owns, but how it allocates capital. Since founding the company in 1995, Mark Leonard has built one of the most disciplined capital allocation platforms in the public markets. The formula is straightforward: acquire high-quality, cash-generative businesses at sensible prices — typically founder-led companies that are leaders in their respective niches — decentralize their operations, hold them forever, and systematically reinvest the cash they produce into acquiring more businesses just like them. Rather than absorbing acquisitions into a centralized structure, Constellation provides guidance, capital, and best practices while allowing local management teams to continue running their businesses independently. It is this reinvestment flywheel, repeated hundreds of times over three decades, that has driven Constellation’s exceptional long-term compounding — delivering returns on invested capital above 20% for decades, a track record that very few businesses can match.

The Current Disconnect

Since its public listing in 2006, Constellation Software has compounded shareholder capital at an exceptional rate, generating a cumulative return of over 13,000%, equivalent to approximately 28% annually. Importantly, this long-term performance has been achieved despite the recent sharp decline in the share price.

As the chart below illustrates, the recent drawdown of approximately 50% is among the most severe in Constellation’s public history. While the company has experienced periodic drawdowns over the past two decades—often in the 20–30% range—the current decline stands out both in magnitude and relative to prior periods.

However, when we examine the underlying business performance, the picture looks very different. In 2025, revenue grew approximately 15%, cash flow from operations increased by 24%, and free cash flow available to shareholders (FCFA2S) grew by 14%. Over the past decade, Constellation has compounded revenue at roughly 20% annually and free cash flow at approximately 21%. The disconnect between business performance and recent share price is particularly notable, as the company continues to execute at a high level despite the recent decline in its stock.

What Is Driving the Decline?

The recent weakness in Constellation’s share price appears to be driven by two primary concerns.

1. Artificial Intelligence and the Future of Software

First is artificial intelligence and its potential to disrupt the software industry. More broadly, sentiment toward software companies has turned sharply negative, driven in part by the belief that advances in AI will commoditize software development—lowering barriers to entry and enabling customers to build their own solutions at a fraction of the cost.

While this may prove true in certain segments of the market, we believe this narrative is often applied too broadly and may not fully account for the structural differences between horizontal software and the vertical market software businesses that Constellation owns.

In many cases, these systems have been developed, refined, and embedded into customer workflows over decades. They are not simply tools, but integral components of how these businesses operate on a day-to-day basis. As a result, the switching costs are not merely financial—they are operational, and in some cases existential.

Importantly, the decision to replace or rebuild such systems is not driven solely by technological feasibility, but by organizational reality. For many of Constellation’s customers—often small and mid-sized businesses—the risks associated with disrupting core systems may outweigh the potential cost savings from alternative solutions. Replacing these systems would require not only technical expertise, but also significant time, capital, and organizational change, all while introducing meaningful execution risk.

In addition, the value of the data embedded within these systems is often substantial. Over time, these platforms accumulate mission-critical customer, operational, and historical data, which can be difficult—if not impossible—to replicate without disruption.

As a result, we believe the risk of rapid displacement may be lower than current market sentiment implies. While AI will undoubtedly influence how software is developed and used over time, we believe it is more likely to enhance the capabilities of Constellation’s vertical market software businesses—making them more valuable to their customers—rather than render them obsolete.

In our view, the market may be extrapolating a generalized narrative onto a highly specialized segment of the software ecosystem, without fully accounting for the durability of these business models.

Importantly, Constellation is not standing still in the face of these developments. Over the past several years, the company has been actively incorporating AI across its operating groups—investing in upskilling its development teams, integrating AI-assisted tools into workflows, and facilitating the sharing of best practices across its portfolio.

Under the leadership of Mark Miller—who has been with Constellation since its first acquisition in 1995, built much of its decentralized operating model alongside Mark Leonard—this is not a new direction, but a continuation of how the company has always operated. Constellation’s approach to AI reflects its core philosophy: a decentralized organization with a strong learning culture, where individual business units apply new technologies in ways that are directly relevant to their customers and vertical markets, rather than through a top-down mandate.

Importantly, management has indicated that long-term differentiation will not come from simply building software faster, but from what these businesses have spent decades developing: deep domain expertise, embedded workflows, proprietary data, and trusted relationships. In this context, AI is more likely to enhance these advantages than erode them.

In addition, the current narrative around AI may create indirect opportunities for Constellation’s capital allocation strategy. As uncertainty around software increases, valuations of potential acquisition targets may decline, which could allow the company to deploy capital at more attractive returns.

Taken together, we believe Constellation may be well positioned not only to navigate this transition, but potentially to benefit from it over time. In many ways, its decentralized structure and culture of continuous learning may prove to be a competitive advantage in adapting to technological change.

2. Leadership Transition

In September 2025, Mark Leonard resigned as President of Constellation for health reasons — a development that, understandably, rattled investors. Leonard is not just a founder; he is widely regarded as one of the greatest capital allocators of his generation. The market had long assigned a premium to his presence, and his departure raised legitimate questions about whether the culture and discipline he built could endure without him.

However, we believe this concern, while valid, underestimates the durability of what Leonard actually built. Constellation was never designed as a one-person organization. Its decentralized structure, deep bench of operators, and disciplined capital allocation framework were built precisely to function independently of any single individual — including its founder.

In a recent call with investors, Mark Miller was explicit: it is business as usual. No changes to strategy, no changes to the management team, and a continued focus on the same long-term, decentralized approach that has compounded capital for three decades.

Conclusion

Investing is rarely comfortable during periods of heightened uncertainty, and Constellation Software today is no exception. A 50% drawdown, concerns around AI disruption, and a leadership transition have created a level of skepticism that, in our view, is understandable. These are legitimate concerns that deserve serious consideration.

Investing, however, is a game of probabilities—not certainties. When we weigh the evidence, we believe the odds favor Constellation navigating these challenges successfully. Its decentralized structure, depth of management, and durable business model were built to withstand periods like this.

The challenge with businesses like Constellation is not understanding them—it is owning them through periods like this. Over time, business performance and market perception tend to converge—but rarely in a way that feels comfortable in the moment. In our experience, it is often these periods—when uncertainty is elevated but the underlying system remains intact—that matter most for long-term outcomes.

About Rowan Street Capital

Rowan Street Capital is a long-term, concentrated investment partnership founded in 2015 by Alex Kopel and Joe Maas. Influenced by the principles of Warren Buffett, we are patient owners of a carefully selected group of exceptional businesses— investing alongside founder-operators and management teams who build durable value over time.

We do not trade, rotate sectors, or attempt to predict the economy. Our focus is simple: own businesses we believe are capable of compounding value over long periods of time.

The hardest part of investing is rarely finding ideas — it is having the temperament to hold them. That temperament defines our approach.

Our capital is invested alongside our partners, and our compensation is tied directly to the performance of our partners’ capital — we charge no fixed management fees.

If our way of thinking resonates with you, we invite you to follow our work on Substack and explore our full investment philosophy at rowanstreet.com.

DISCLOSURES

The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot ensure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees.

The Long Game

Meta has delivered a cumulative return of approximately 1,300% since its IPO, or about 21% annually. The path to those returns, however, has been anything but smooth.

Over the past decade, the stock has experienced numerous drawdowns of 30% or more, several declines of 50% or more, and most notably, a decline of nearly 80% in 2022. These periods were not isolated events — they were a recurring feature of owning the business.

Everyone aspires to earn returns of this magnitude and describes themselves as a long-term investor. In practice, very few are willing — or able — to endure the level of volatility required to achieve them.

The Current Setup

Meta Platforms is where we believe the current environment has created a compelling opportunity in our portfolio.

In late January, the company reported one of its strongest quarters in recent memory — revenues of $59.9 billion, growing 24% year over year, with earnings well ahead of expectations. The stock jumped nearly 10% on the news. Investors were gaining confidence that Meta’s massive AI investment was offensive in nature — deepening its moat rather than straining its balance sheet.

Then two court rulings arrived in quick succession.

One in New Mexico, one in California, found Meta liable for failing to adequately protect young users on its platforms. A $375 million penalty was imposed, and the prospect of further litigation remains real. The stock lost over $100 billion in market value in a matter of days. Combined with broader tech weakness, Meta now sits approximately 12% below where it started the year — and nearly 30% below the highs it reached in the summer of 2025.

We will not minimize the legal risk. These are genuine headwinds, not footnotes. But Meta generated over $43 billion in free cash flow last year. For a business of this scale, these are manageable costs — serious, but not existential. In our view, the selloff was a reaction to headlines, not to business fundamentals.

We Have Seen This Before

In November 2022, with Meta’s stock down 75% and its market cap having shed $750 billion in a single year, we published a piece asking a simple question: does this make any sense?

The answer, in our view, was no. The stock price had become disconnected from the underlying business. The market was focused on near-term cost increases and capital expenditures, while ignoring what Zuckerberg was actually building. We argued then that the spending was defensive and necessary, that the founder-CEO mindset made all the difference, and that the long-term earnings power of the business was being significantly underappreciated.

What followed was one of the great business re-ratings of the past decade.

We believe certain elements of that dynamic may be present today — though every situation is different and past outcomes are not a guide to future results. For those interested, the full 2022 piece is available on our website.

The Concerns Are Real — But Familiar in Character

Meta has announced capital expenditures of up to $135 billion in 2026, nearly double what it spent in 2025. Operating margin has already compressed from 48% to 41% in the most recent quarter. The market’s central concern is not that Meta is unprofitable today — it generated over $43 billion in free cash flow last year. The concern is whether $135 billion in annual capital expenditure will generate returns that justify the investment, and when. That uncertainty is real. We do not dismiss it.

But here is what the numbers actually show. Meta reaches over 3.5 billion people every single day across Facebook, Instagram, WhatsApp, and Messenger. Its advertising engine grew revenues over 20% last year. And the AI systems it has been building are not speculative bets on some distant future — they are already working, quietly improving engagement, ad pricing, and monetization in the background.

What struck us most in the most recent earnings call was not the revenue growth — though it was impressive. It was the discipline behind the capital allocation. Management described a rigorous, ROI-driven process: projecting returns across ads performance, engagement, and AI efficiency initiatives, stack-ranking them, and funding only those with attractive expected returns. The 2025 investments delivered strong results. The same framework is being applied to 2026.

This is not reckless spending. This is a great business systematically reinvesting into high-return improvements to its own engine while building the infrastructure it believes will define the next era of AI-driven computing. The spending is offensive, not desperate. There is an important difference.

Where We Are Focused

In our view, the market today is focused on what Meta will earn in the next few quarters. We are focused on what it will look like in five to ten years. That difference in time horizon is, we believe, where the opportunity lives.

Zuckerberg is investing decisively in AI dominance — though it is worth being precise about where Meta stands today. In the race to build frontier AI models, Meta has faced setbacks. Its Avocado model was delayed after internal tests showed it trailing competitors from Google and OpenAI. That is a real challenge and the market has noticed.

But here is a distinction worth emphasizing. Meta does not need to win the AI model race to win the AI era. It needs AI to make its existing products — used by over 3.5 billion people every day — more valuable. And on that front, the evidence is already compelling. AI-powered recommendation systems are improving engagement and ad pricing today. AI video tools alone are generating $10 billion in annual recurring revenue, growing three times faster than overall advertising revenue. The infrastructure being built now is designed to deepen these advantages further.

This is a business using AI as a weapon to compound an already dominant position — not a startup betting its survival on building the best model.

The people running this company have put that conviction in writing. In March 2026, Meta filed with the SEC a new executive compensation structure — the first stock option grants the company has issued since its 2012 IPO. Six of Meta’s most senior leaders, including the CFO, CTO, and COO, were granted options that pay out only if Meta’s stock reaches $3,727 per share by 2031 — implying a market capitalization of approximately $9 trillion. That is more than six times today’s stock price. Executives receive nothing unless shareholders are extraordinarily well rewarded first.

Notably, Mark Zuckerberg is not part of the program. He doesn’t need to be — he already owns roughly 13% of the company. His alignment with long-term shareholders is structural, not contractual.

This is not the behavior of a management team that believes it is building something temporary.

As in 2022, we believe the gap between price and value has widened. Our response is the same as it was then — stay focused on the business and let time do the work.

About Rowan Street Capital

Rowan Street Capital is a long-term, concentrated investment partnership founded in 2015 by Alex Kopel and Joe Maas. Influenced by the principles of Warren Buffett, we are patient owners of a carefully selected group of exceptional businesses— investing alongside founder-operators and management teams who build durable value over time.

We do not trade, rotate sectors, or attempt to predict the economy. Our focus is simple: own businesses we believe are capable of compounding value over long periods of time.

The hardest part of investing is rarely finding ideas — it is having the temperament to hold them. That temperament defines our approach.

Our capital is invested alongside our partners, and our compensation is tied directly to the performance of our partners’ capital — we charge no fixed management fees.

If our way of thinking resonates with you, we invite you to follow our work on Substack and explore our full investment philosophy at rowanstreet.com.

Past performance is not indicative of future results. This article is for informational purposes only and does not constitute investment advice or a solicitation to invest.

DISCLOSURES

The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot ensure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees.

In 2025, Rowan Street generated a +11.1% net return, compared with +17.9% for the S&P 500. While we underperformed the index, we still delivered a solid absolute result following two unusually strong years. Over the past three years, Rowan Street has generated a cumulative net return of +252%, compared with a +78% total return for the S&P 500.

Rowan Street is a concentrated strategy built for long-term compounding, not for minimizing short-term volatility or closely tracking a benchmark. As a result, returns will differ meaningfully from year to year. Periods of underperformance are inevitable, just as periods of strong outperformance—such as in 2023 and 2024—are part of the same process. We believe individual years, viewed in isolation, are of limited significance; over time, results should reflect the compounding of intrinsic value at the business level.

Performance in 2025 was driven by our highest-conviction holdings. Tesla, a position we began building in the first half of 2025, was the largest contributor, adding approximately +6.8% to returns. Shopify and Spotify also contributed meaningfully, adding +5.6% and +4.5%, respectively. Meta Platforms, our largest holding, contributed +4.3% despite a disappointing fourth quarter (we discuss Meta in greater detail in a case study later in the letter).

Underperformance was largely attributable to The Trade Desk (TTD), which reduced returns by approximately -6.9%. While disappointing, TTD is now a much smaller weight in the portfolio. We continue to evaluate the business over a multi-year horizon rather than a single calendar year, and address our current thinking in a dedicated case study later in this letter.

The table below shows the annual returns of our largest holdings by portfolio weight as of December 31, 2025 and illustrates a simple reality of long-term investing: even exceptional businesses experience significant volatility.

Long Term Results

The table below summarizes Rowan Street’s annual results since inception, along with compounded returns over longer periods:

Over the past several years, Rowan Street has operated with a high degree of focus and discipline. We have remained invested in largely the same core group of businesses, allowing time and compounding to do the heavy lifting.

While stock prices moved sharply from year to year, the underlying companies continued to execute, strengthen their competitive positions, and grow intrinsic value.

The portfolio today reflects that discipline: a select number of high-quality businesses with strong balance sheets, durable economics, and the ability to reinvest free cash flow at attractive rates of return across cycles.

We make fewer decisions, own fewer companies, and hold them longer—so that long-term business performance, rather than short-term market movements, determines outcomes. This approach may not always look exciting in any single year, but we believe it is what allows results to compound favorably across full market cycles. The portfolio that follows reflects this philosophy in practice.

Our Portfolio: Long-Term Compounding in Action

The table below presents the Rowan Street portfolio as of December 31, 2025, ranked by portfolio weight. It reflects substantially all invested capital at that date and includes the date of initial investment and internal rate of return for each holding.

Case Studies in Capital Allocation and Temperament

Successful long-term investing does not require brilliance or a stratospheric IQ (fortunately for your fund managers). It requires a sound decision-making framework, a rational definition of risk, and—most importantly—the temperament to apply that framework consistently through both favorable and difficult environments. Many investment mistakes occur not because the framework is flawed, but because it becomes corroded under stress, crowd influence, or short-term performance pressure.

In the following case studies, we offer a practical view into how Rowan Street allocates capital and manages risk across different circumstances. Each example highlights a distinct aspect of our process: how we remain committed to a great business through severe pressure, how patience is often required long before results appear, how position size is allowed to adjust when leadership or fundamentals are tested, and how we act decisively when long-term opportunity finally presents itself. Together, they are intended to provide a clear picture of the framework and temperament that guide our decisions.

Meta Platforms (META): Letting Compounding Do the Work

Meta Platforms is our largest position. We first invested nearly eight years ago and have never sold a share. Over that period, the investment has compounded at approximately 19% annually.

Meta did not become a large position by design. It earned its weight over time as the business consistently grew revenues, earnings, and cash flow. As intrinsic value compounded, the stock price followed. As shown in the table below, the company’s fundamental growth broadly tracked the long-term return we achieved.

We did not trim the position simply because it became large. Many investors treat position size itself as a source of risk and respond by systematically reducing their most successful holdings. Our experience has been the opposite. Interrupting the compounding of exceptional businesses has been among the more costly mistakes we made earlier in our careers.

Charlie Munger captured this idea succinctly: “The first rule of compounding is to never interrupt it unnecessarily.” Peter Lynch expressed the same lesson more colorfully as “pulling out the flowers and watering the weeds.” Both observations reflect lessons learned through experience, not theory.

We think about risk differently than most investors. In our view, risk is not volatility, benchmark deviation, or position size. Risk is the probability of permanent capital loss. A durable, self-funding business with strong competitive advantages and owner-oriented leadership can be safer at a large weight than a weaker business held at a smaller one.

Mark Zuckerberg has a long history of prioritizing long-term competitive positioning over near-term earnings. Decisions that were initially unpopular — including the early shift to mobile and the acquisitions of Instagram and WhatsApp — ultimately proved foundational to the business we own today. We view the current investment cycle through the same lens: a deliberate effort to extend Meta’s competitive advantages over the coming decade rather than to optimize quarterly results.

Following Meta’s most recent earnings release, there was early evidence that these investments are already improving the effectiveness of the company’s core advertising platform, with benefits flowing through to engagement, monetization, and operating cash generation — even as free cash flow remains temporarily constrained by elevated capital expenditures. While we do not draw conclusions from a single quarter, the underlying economics are evolving in the direction we expected.

Meta has been a clear example of our core investment principle in practice: owning a select number of exceptional businesses and allowing compounding — rather than activity — to drive long-term results.

Shopify (SHOP): Patience Before Payoff

We initiated our investment in Shopify in the first quarter of 2022, after the stock had already declined more than 60% from its pandemic peak. Growth had slowed from extraordinary COVID-era levels, sentiment toward technology stocks had turned sharply negative, and valuation multiples were compressing across the sector. At the time, we believed we were paying a reasonable price for a high-quality business we had followed for many years.

After our initial purchase, the stock declined another ~50% as valuation multiples continued to contract. At its low point, Shopify traded near 7x sales—down from peak levels above 50x—despite the business continuing to grow revenues at a healthy rate and strengthen its competitive position. The drawdown reflected multiple compression rather than fundamental deterioration.

Throughout this period, Shopify continued to execute. Management refocused the business, improved efficiency, and prioritized long-term economics over short-term optics. Growth moderated to the mid-20% range, but the company’s merchant ecosystem expanded, merchant services deepened, and operating leverage gradually emerged.

Returns did not arrive quickly. For an extended period, the investment was down or flat while the business continued to compound. It was only in 2024—when Shopify generated over $1 billion in operating profit for the first time—that fundamentals became impossible to ignore.

As shown in the table below, our returns have been driven primarily by growth in revenues, operating profits, and cash flows rather than multiple expansion. Valuation multiples today are only modestly higher than when we first invested, despite significant volatility along the way.

Since our initial investment, Shopify has compounded at approximately 28% annually (as of December 31, 2025) and was our best performer in 2025, with the stock rising +51%. Shopify is a clear example of why patience—especially through periods of valuation compression—is often required before fundamentals are fully reflected in stock prices.

The Trade Desk (TTD): When Conviction Is Tested

We first invested in The Trade Desk in early 2020 because we believed it was building critical infrastructure for the open internet—an independent, asset-light, data-driven advertising platform with strong network effects, growing rapidly while remaining solidly profitable. The business executed well for many years, and as fundamentals compounded, the position grew organically from an initial weight of approximately 3% to over 12% of the portfolio at its peak.

During this period, conditions were favorable. Growth was consistent, industry tailwinds were strong, and execution appeared disciplined. Importantly, however, this was a phase in which the company—and its leadership—had not yet been tested by sustained adversity.

That test arrived in late 2024.

After peaking in December 2024, the stock declined sharply following its Q4 2024 earnings release, which included a rare revenue miss. Shares fell more than 30% in the immediate aftermath and continued to decline through 2025, as subsequent results and guidance failed to restore confidence. What followed was not a single reaction, but a broader reassessment—by us and by the market—of management’s communication, accountability, and adaptability under pressure.

Conviction is not declared. It is earned—often slowly, and usually through adversity.

Importantly, despite the severity of the drawdown, the investment remains profitable. From inception, the Trade Desk has compounded capital at a rate north of 10% annually, even after the decline. This is not a case of permanent capital impairment for us, but of moderated expectations and recalibrated conviction.

In our experience, many management teams perform well when conditions are accommodating. Far fewer demonstrate the clarity, transparency, and decisiveness required when growth slows, expectations reset, and credibility is questioned. It is during these periods that management character is revealed.

In The Trade Desk’s case, while leadership continued to emphasize long-term opportunity and total addressable market, investors sought clearer ownership of execution missteps, more concrete evidence of competitive share gains, and greater precision in communication. That gap mattered. Not because the long-term opportunity disappeared, but because trust and conviction are built—or eroded—during difficult periods, not easy ones.

As a result, while we continue to believe The Trade Desk remains a high-quality business with attractive long-term attributes, our conviction has moderated. We chose not to add to the position during the decline, nor to defend its prior portfolio weight. Instead, we allowed the position to adjust naturally as the market reassessed the business. Today, the position has returned to approximately its original percentage of the portfolio, though the capital invested remains meaningfully higher due to prior compounding.

This outcome was not the result of forced rebalancing or reactive decision-making. It reflects a core element of our process: the stocks that go up and become larger pieces of the portfolio have earned that right. The stocks that go down and become less significant have earned their fate. The portfolio wants to be in winners, and it will concentrate itself more and more into winners if you let it.

Certain businesses earn the right to become core holdings only after leadership has been tested through adversity. Meta earned that status within our portfolio over multiple cycles in which management demonstrated accountability, adaptability, and disciplined execution under extreme pressure.

Tesla (which we will talk about next) represents a different—but related—case. While it is still a relatively new position for us, the business itself and its leadership have already been tested through extraordinary adversity well before our investment. That history informed our willingness to initiate and size the position when the opportunity finally presented itself.

The Trade Desk remains under observation. Conviction will not be restored by market sentiment or valuation, but only if management demonstrates greater ownership of results, improved clarity in communication, and the ability to adjust strategy as conditions evolve.

Tesla, Inc. (TSLA)

Tesla is our newest core investment and was the only new position initiated during 2025. We began building the position during the first half of the year, at a time when sentiment toward the company was notably pessimistic and investor confidence was low.

We viewed this environment not as a signal of business impairment, but as an opportunity to establish long-term ownership in a company we believe possesses exceptional competitive advantages, deep first-principles engineering capabilities, and a culture oriented toward long-duration value creation. Tesla is led by a founder whose willingness to invest through uncertainty, endure prolonged adversity, and focus on difficult problems has, in our view, repeatedly reshaped entire industries.

Importantly, while Tesla has demonstrated resilience and execution across multiple cycles as a business, it has not yet proven itself within our portfolio, despite a short-term share price advance of more than 50% since purchase. As with all investments, its ultimate weight and role will be determined not by our intentions, but by the company’s ability to execute and compound intrinsic value over time.

We previously outlined our full investment thesis for Tesla in our Q3 2025 letter and encourage partners to review that discussion. From here, our role is one of patience and discipline — allowing long-term outcomes, rather than near-term sentiment or market volatility, to determine the result of this investment.

As with Meta and Shopify, we believe the most important contributor to long-term results will be our ability to avoid unnecessary interruption of compounding.

Looking Ahead

Today, our portfolio represents the strongest collection of businesses we have owned since inception. This is not because every holding has worked or markets have been cooperative, but because the portfolio has been allowed to evolve naturally over time. Businesses that have executed well through adversity have been permitted to grow in importance; others, where outcomes remain uncertain, have been allowed to recede without forcing action.

Over time, markets do a surprisingly good job of sorting businesses by quality if investors have the patience to let them. Our job is not to constantly rearrange the pieces, but to apply a consistent framework, define risk sensibly, and maintain the temperament required to let compounding work. The case studies in this letter reflect that approach in practice.

We remain focused on owning a select number of exceptional businesses, led by capable and tested management teams, and holding them long enough for their economics to reveal themselves. With that mindset, and with partners who share it, we believe the results will take care of themselves.

Thank you for your continued trust, partnership, and patience. It is a privilege to grow your capital alongside our own.

Warm regards,

Alex & Joe

If you enjoyed this letter, you can find all of our past writings and learn more about our investment philosophy at www.rowanstreet.com.

DISCLOSURES

The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot ensure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees.

This week I read Warren Buffett’s final letter — his quiet goodbye after more than six decades of teaching the world how to think about business, investing, and life. I didn’t expect it to hit me the way it did. It felt like a chapter closing in real time — the Buffett era that shaped the entire direction of my life.

My journey into investing began in a finance class at USC. The professor posed a simple question: “If markets are efficient, how do you explain Warren Buffett?” He showed our class a graph comparing Buffett’s results to the averages. One by one, he asked every student for an explanation. No one had one — including me.

For some reason, that question shook me awake.

I went straight to the bookstore and picked up The Warren Buffett Way by Robert Hagstrom. I couldn’t put it down. The logic, the rationality, the simplicity — it felt like reading something written in the exact language my mind was wired for. I’d been fascinated by stocks since high school, but I had no real direction, no philosophy, no framework. Buffett once said what became my favorite quote — the idea that shaped my entire approach to investing:

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”

For the first time, I felt like I had found it. A sense of clarity washed over me — I wasn’t just learning about investing; I was finally seeing the path I was meant to follow. By the time I finished the book, I knew exactly what I wanted to do with my life.

From that day forward, I devoured everything Buffett ever wrote — and everything ever written about him. His shareholder letters became my real education, far better than anything a business school could teach. Through them, he taught me how to think about businesses, competitive advantages, management quality, and long-term ownership. But he also taught me something deeper: how to live with integrity, patience, discipline, and character.

Every February, I looked forward to his annual letter like a kid waiting for Christmas morning. It wasn’t just investing. It was mentorship from afar. People often talk about how important it is to have a mentor early in life. The truth is, I never found that person in the traditional sense. I never had someone sit me down, guide me, open doors, or teach me how to make decisions. But I did have Warren — and Charlie. Even though I never met either of them, they mentored me through their writings, their interviews, their annual shareholder meetings where they tirelessly answered questions, their decisions, and the lives they lived. Their words became my guideposts when I didn’t have anyone else showing me the way.

In his final letter, Warren wrote: “Get the right heroes and copy them.” I smiled when I read that, because I realized I had been doing exactly that for nearly two decades. His heroes were Ben Graham and Tom Murphy. Mine were Warren and Charlie. And in my own small way, I tried to walk the path they illuminated. Rowan Street Capital was born out of that desire. I knew early on that if I wanted to invest the way Warren taught — patiently, independently, without the noise and incentives of Wall Street — I couldn’t do it inside a big firm. And truthfully, I couldn’t do it working for anyone else either. Starting Rowan Street was my way of honoring the principles he lived by. It was the only way I could truly invest the way my heroes taught.

Reading this final letter made me feel something I didn’t expect: sadness, gratitude, and a deep awareness of how fortunate I’ve been to learn from him. Without Warren Buffett, I simply wouldn’t be doing what I do today. His writing shaped the way I think, the way I invest, and the way I live. Rowan Street Capital exists in large part because one man in Omaha chose to share his wisdom with anyone willing to listen.

It truly is the end of an era.

But it’s also the beginning of a quiet responsibility — for those of us shaped by his teachings — to carry forward the principles he lived by: rational thought, unwavering patience, emotional discipline and temperament, integrity above all, and the courage to think independently and long-term in a world obsessed with short-term gains.

Thank you, Warren, for everything.

You changed my life.

And I hope I can honor even a small part of what you taught me — in the way I invest, the way I think, and the way I live.

— Alex Kopel

(These are my personal reflections and not investment advice.)

Few compensation structures in corporate history have generated as much debate as Elon Musk’s. But viewed through the lens of long-term ownership — the only lens that truly matters — it becomes clear: this is not about money. It’s about alignment, execution, and mission control.

Over the past decade, Musk’s prior compensation plans have delivered extraordinary results for shareholders. The 2012 CEO Performance Award helped lift Tesla from under $4 billion in market cap to well over $55 billion within just a few years. The 2018 Award — approved by nearly three-quarters of independent shareholders — set the stage for Tesla’s growth to more than $1 trillion in market value. Both programs were 100% performance-based, with no salary, no cash bonus, and no guaranteed equity. Musk only got paid when shareholders did.

With shareholders set to vote by November 6, Tesla’s board is putting forward the 2025 CEO Performance Award (see proxy here)— a bold new 10-year plan that realigns Musk with Tesla’s next chapter: AI, autonomy, energy, and robotics — and restores and restores the all-or-nothing performance philosophy that made Tesla what it is today.

A Look Back: Elon Musk’s 2012 CEO Performance Award

Context

Back in 2012, Tesla was a niche automaker with a market cap under $4 billion. The Model S hadn’t even rolled off the production line yet, and Musk’s now-famous Master Plan — to build affordable electric cars and scale to mass production — was still just a vision.

Structure

The plan granted 10 tranches of stock options, each requiring:

1. a $4 billion increase in Tesla’s market capitalization, and

2. achievement of a major operational milestone — such as a new vehicle launch, production target, or profitability goal.

No salary. No cash bonus. 100% performance-based.

For Musk to earn the full award, Tesla’s market cap had to rise to roughly $43 billion — more than tenfold growth.

Outcome

The results were extraordinary. Within five years, Tesla’s market cap climbed from under $4 billion to over $55 billion. Musk delivered the Model S, Model X, and Model 3, expanding the company into energy generation and storage along the way.

Shareholders took notice — Tesla’s “Say on Pay” votes passed with over 94% (2014) and 99% (2017) support. The 2012 award proved a simple truth: when you align incentives with outcomes, innovation follows.

The 2018 CEO Performance Award: Scaling the Vision

Context

By 2017, Tesla had completed its 2012 plan and was entering a new era. The company’s market cap had reached roughly $60 billion, already larger than any North American automaker. The board’s challenge was clear: how to keep Musk’s focus squarely on Tesla amid his growing universe of ventures — SpaceX, Neuralink, and The Boring Company — while driving the next phase of growth.

Structure

The answer came in another bold, all-or-nothing plan.

• No salary. No cash bonus. No time-based equity.

• 12 tranches of stock options, each representing 1% of Tesla’s shares outstanding at the time, would vest only if both of the following conditions were met:

  1. Tesla’s market capitalization increased by $50 billion per tranche, from $100 billion to $650 billion, and

  2. The company achieved a series of operational and financial milestones — including ambitious revenue and EBITDA targets.

To ensure enduring alignment, Musk was also required to hold all vested shares for five years. The plan was approved at a special shareholder meeting with 73% support, excluding votes from Elon and Kimbal Musk.

Board’s Rationale

The logic behind the plan was straightforward:

1. No results, no pay — pure performance alignment.

2. Maintain Musk’s long-term focus on Tesla despite his other ventures.

3. Execute “Master Plan, Part Deux” — expanding Tesla’s reach into energy generation, storage, autonomous driving, and mass-market vehicles.

Outcome

Within just four years, Tesla’s valuation exploded past $650 billion, triggering all 12 tranches. The company became the most valuable automaker in history — and one of the fastest-growing enterprises the market has ever seen.

Though the plan was later challenged in Delaware courts on procedural grounds, its impact is undeniable: it created over $600 billion in shareholder value, validating once again that true pay-for-performance works when incentives are tied to long-term results.

Key Takeaway

From 2012 to 2018 to 2025, the evolution of Elon Musk’s compensation has been remarkably consistent — a masterclass in alignment. Each plan has shared the same DNA: zero cash pay, all-or-nothing equity, and alignment before reward.

Every iteration has simply scaled with Tesla’s ambition — from a $4 billion startup to a $1 trillion powerhouse — and every time, it has delivered extraordinary results for long-term shareholders.

The 2025 plan carries this lineage forward, reaffirming a timeless principle: when leadership’s incentives mirror those of owners, value creation compounds.

Tesla’s Third Act: The 2025 CEO Performance Award

Building on the success of the 2012 and 2018 plans, Tesla’s next chapter extends the same pay-for-performance philosophy — one rooted in execution, innovation, and long-term alignment.

Each of Musk’s previous compensation plans powered a distinct phase of Tesla’s evolution:

• 2012: The startup phase — proving an electric car company could survive.

• 2018: The scale phase — transforming Tesla into one of the most valuable enterprises on Earth.

Now, in 2025, Tesla enters its third act — a transformation from an EV and energy company into a full-fledged AI and robotics platform. This next stage demands a compensation structure that reflects both the scale of the opportunity and the weight of the mission.

Structure of the 2025 CEO Performance Award

• Term: 10 years (2025–2035)

• Form: 100% performance-based restricted stock

• Tranches: 12 equal tranches

• Strike Price: Roughly $350 per share

• Vesting: Each tranche vests only when Tesla achieves both a market cap milestone and a performance milestone

• No Salary, No Bonus: Musk earns nothing unless shareholders gain massively

• Holding Period: Multi-year lockup after vesting to ensure long-term alignment

Market Capitalization Milestones

The plan envisions Tesla’s journey from roughly $1 trillion today to $8.5 trillion by 2035 — an eightfold increase in shareholder value.

Each tranche corresponds to a roughly $500–$700 billion rise in market capitalization, representing about $7 trillion in total value creation if all are achieved.

Financial Milestones — EBITDA Targets

To complement those valuation goals, Tesla must also achieve eight consecutive EBITDA milestones, ranging from $50 billion to $400 billion in trailing twelve-month operating earnings. For context, Tesla’s current EBITDA is around $11–12 billion — meaning the very first milestone alone requires nearly a five-fold increase in operating performance, and the top milestone represents roughly a 35–40x leap. These goals are designed not for incremental growth, but for transformation — demanding near-flawless execution across vehicles, energy storage, software, and AI infrastructure.

Strategic Product Execution Milestones

In addition to financial performance, four product milestones define Tesla’s innovation roadmap for the decade ahead:

1. 20 Million Vehicles Delivered — scaling affordability and strengthening Tesla’s real-world driving data.

2. 10 Million Active FSD Subscriptions — creating a recurring, high-margin AI-driven software business.

3. Commercial Launch of the Tesla Robotaxi Network — monetizing idle vehicles through autonomous ride-hailing.

4. Deployment of Optimus Humanoid Robots — positioning Tesla at the forefront of automation and productivity, potentially the most transformative product since the iPhone.

Together, these milestones redefine Tesla’s identity. It’s no longer just an automaker — it’s an AI, robotics, and energy ecosystem that could reshape global productivity and mobility.

Why It Matters for Long-Term Shareholders

This award isn’t a bonus — it’s a performance contract. Musk’s payout only materializes if shareholders first create trillions of dollars in value. If he succeeds, Tesla could become one of the most valuable enterprises in human history — not through financial engineering, but through sustained innovation and execution.

It also preserves what Musk values most: control over the mission. If all tranches vest, his ownership could rise from roughly 12% today to 22–24%, ensuring he retains enough influence to guide Tesla’s AI and robotics technologies responsibly and in alignment with his long-term vision for humanity.

Musk has often emphasized that his motivation isn’t personal wealth — it’s mission control. He’s building technologies that could reshape civilization itself: autonomous AI, humanoid robots, neural networks. In his words:

“If someone else controlled Tesla’s AI, they could potentially misuse it. I need to have enough influence to make sure it’s aligned with humanity’s best interests.”

This compensation structure serves as his built-in safeguard — a way to remain at the helm, not to enrich himself, but to ensure the technologies he’s unleashing advance human progress rather than threaten it.

The Rowan Street View

At Rowan Street, we’ve always believed that true wealth creation happens when management and shareholders are aligned around a shared mission — with skin in the game and long-term accountability.

Elon’s new plan embodies exactly that. It’s bold. It’s audacious. And it’s capitalism at its purest form — no pay for promises, only for performance.

If it works, Tesla shareholders won’t just own a car company. They’ll own a stake in the infrastructure of the future — autonomous mobility, global energy storage, and humanoid robotics.

This is the kind of performance structure we dream of seeing across corporate America — a model of vision, discipline, and alignment that represents capitalism done right: no guarantees, no safety nets, just radical accountability tied to long-term value creation.

Best regards,

Alex and Joe

DISCLOSURES

This commentary reflects the opinions of Rowan Street Capital LLC as of the date of publication and is provided for informational and educational purposes only. It does not constitute investment advice, a recommendation to buy or sell any securities, or an offer to invest in any Rowan Street fund.

The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions, and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor.

An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the fund’s definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds.

This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests in our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses.

As with any investment vehicle, past performance cannot ensure any level of future results. If applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund.

All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends, and includes allocation for incentive interest and has not been audited (except for certain year-end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The Top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point, and there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees.

Our fund was essentially unchanged in the third quarter (+0.22%), bringing year-to-date returns through September 30, 2025, to +20.4% net of fees. In comparison, the S&P 500 gained approximately +14.8% year-to-date.

Over the past three years, we’ve enjoyed a remarkable run, compounding capital at approximately +54.2% annually (net), delivering a +266% cumulative return — more than doubling the S&P 500’s +24.9% annualized gain over the same period. These are rare numbers — and while we don’t expect this pace to continue indefinitely, they illustrate what’s possible when our investment philosophy is applied with discipline, patience, and conviction.

Our performance wasn’t driven by fads or short-term tactics, but by a disciplined adherence to a process refined through years of experience, mistakes, and reflection. Today, we manage what we believe is the strongest and most focused portfolio in our history — anchored by a small group of exceptional businesses led by world-class owner-operators who allocate capital with skill, integrity, and long-term vision.

When Conviction Matters Most

Three years ago, in our Q3 2022 letter, we wrote about the importance of staying disciplined through uncertainty — of owning exceptional businesses and letting time and compounding do the heavy lifting. At the time, markets were dominated by pessimism, and our focus on long-term ownership felt almost contrarian.

But those who have been with us through the years know that moments like 2022 are when conviction matters most. Every time we’ve pounded the table — when fear was highest and sentiment most negative — it has ultimately proven to be a great opportunity for long-term investors in Rowan Street. When we take a strong stand like that, it’s usually worth paying attention — and, for those able, adding to their investment alongside us.

What has unfolded since then is a powerful reminder of why we invest the way we do. The patience and conviction that felt uncomfortable in 2022 became the foundation for one of the most rewarding periods in our partnership’s history.

Our Portfolio: Long-Term Compounding in Action

Listed in the table below are our core holdings, sorted by their weighting in the portfolio (from highest to lowest). These positions represent the businesses in which we have the highest conviction and alignment with exceptional owner-operators.

Core Portfolio Holdings: Performance Summary

Meta Platforms (META) has been our largest holding for several years and remains one of the best examples of what long-term ownership in an exceptional business can deliver. Since our initial purchase more than seven years ago, Meta has compounded at over 21% annually — a testament to its enduring competitive advantages, operational excellence, and the compounding power of time. We’ll keep our commentary brief here, as we’ve discussed Meta extensively in prior letters — its journey illustrates the benefits of patience, conviction, and alignment with a world-class founder-operator.

Shopify (SHOP) has been in our portfolio for just over three years and has compounded at 29% annually. It has also been our best performer in 2025, driven by operating leverage, margin expansion, and renewed investor confidence in its long-term growth prospects. Shopify continues to strengthen its ecosystem through product innovation, deeper merchant integration, and new AI-driven tools — including a recent partnership with ChatGPT — all under the guidance of a founder-led management team that remains laser-focused on durable, long-term value creation.

Tesla (TSLA) is our newest idea, which we’ll discuss in detail later in the letter. Since initiating the position earlier this year, it has appreciated roughly 76%. While we’ve only owned it for seven months and it’s too early to determine what kind of IRR it will ultimately deliver, Tesla embodies exactly the type of founder-led, competitively advantaged business we aim to own for many years.

Spotify (SPOT) has been part of our portfolio for more than seven years — a holding period that we aim for when we make an initial purchase. While we’ve sold approximately 85% of our original position over time, Spotify has delivered a long-term internal rate of return (IRR) of roughly 13%. Our IRR calculation reflects the true, cash-weighted compounding of capital — incorporating all capital invested, proceeds from partial sales, and the current market value of remaining shares. At one point, Spotify represented more than 20% of the portfolio, but over time we concluded that the strength and durability of its moat did not justify such a large weighting. Much of the realized capital from those trims was redeployed into new ideas such as Adyen, Dino Polska, and most recently Tesla, which we’ll discuss later in this letter. Today, Spotify remains a meaningful 7.8% position — a level more consistent with our view of its competitive advantages and long-term prospects.

Topicus (CVE:TOI), which we’ve owned for about four years, has compounded at roughly 18% annually. A European spin-out of Constellation Software, Topicus embodies the same disciplined, decentralized model — acquiring niche vertical market software businesses with recurring revenue, high returns on capital, and strong cash generation. It’s a steady, capital-light compounder that quietly builds long-term value year after year.

Netflix (NFLX) has been in our portfolio for over five years and has compounded at 23% annually. The past three years have been especially telling. When the stock collapsed in 2022 amid fears of saturation and rising competition, we stayed patient — confident in the company’s pricing power, global scale, and unrivaled content engine. Since then, Netflix has proven its resilience, reigniting growth through paid sharing, advertising, and improved content efficiency. It’s a powerful reminder that truly exceptional businesses often emerge from temporary doubt stronger than before.

Dino Polska (WSE:DNP), added in 2024, has already gained around 30% since our purchase — a strong start for a business we expect to grow steadily for many years. Dino operates a fast-growing, vertically integrated grocery chain in Poland, combining local store ownership with centralized distribution and private-label sourcing. Its moat lies in cost efficiency, local scale advantages, and ownership of key assets — enabling Dino to deliver low prices profitably while deepening loyalty among Polish consumers. We see it as a classic Rowan-style compounder: simple, focused, and built for long-term value creation in a still underpenetrated market.

Adyen (ADYEY), acquired in 2023, has compounded at an exceptional 44% annualized rate so far. We initiated our position during a period of extreme pessimism, after the stock collapsed nearly 50% on fears of slowing growth and margin compression. In our view, the market overreacted to short-term headwinds, missing the deeper story: Adyen is the only global payments platform built entirely in-house for the most complex enterprise merchants — a unified architecture that gives it a structural advantage competitors can’t replicate. As fundamentals quickly stabilized and growth reaccelerated, the stock rebounded sharply — rewarding our willingness to lean in when sentiment was darkest. We continue to view Adyen as one of the highest-quality fintech businesses in the world, led by a shareholder-aligned team that thinks long term.

The Trade Desk (TTD), which we first purchased in March 2020 during the depths of COVID panic, has compounded at roughly 20% annually. In 2025 though it has been our weakest performer, declining more than 50% as the market questioned whether its recent growth slowdown is cyclical or more structural in nature. While we continue to admire the business, recent management communication has raised concerns. CEO Jeff Green’s handling of the past two earnings calls — marked by vague explanations and a lack of accountability — gave us pause. Exceptional leaders reveal their character in adversity, and this has been his first true test. The position has naturally declined to about 4.5% of the portfolio, and we’re content to let performance dictate its future weight. If execution improves, it will naturally grow into a larger holding; if not, our low cost basis protects us.

As always, time will be the ultimate judge — our goal is to turn every holding into a long-term compounding engine within Rowan Street’s portfolio.

Why This Matters

Collectively, these holdings capture the essence of what we strive to do at Rowan Street — own a small group of exceptional businesses for many years and let compounding quietly do the heavy lifting.

Our IRR framework reflects how we measure success at the individual investment level. If the businesses we own continue to compound at 15–20%+ annual rates, our process is working — even if the fund’s overall record hasn’t yet fully reflected that compounding due to the higher turnover of our earlier years.

Over time, the power of patience and discipline will close that gap — just as it always does for those who think and act like true owners.

New Addition: Tesla (TSLA)

In 2025, we made just one new investment — Tesla — during a period of widespread pessimism. Back in March and April, sentiment around the company and its CEO was near rock bottom. Headlines were dominated by controversy, and investors were fleeing what they perceived as chaos. We saw an opportunity.

This is precisely what we do at Rowan Street. Our sweet spot is patiently waiting for moments of dislocation — and stepping in with conviction while others hesitate. It’s how we built many of our most successful positions: Meta in 2018 and again in 2022 when sentiment was bleak… Shopify during the 2022 tech collapse… Spotify and Netflix, which we were buying in early 2022 precisely when others — including some of the most respected investors in the world — were throwing in the towel. We applied the same philosophy with Adyen in 2023, after the market overreacted to short-term margin pressure, and again with Dino Polska in 2024, when the stock sold off sharply following a temporary slowdown in revenue growth and margin compression, driven by deflationary food prices and higher marketing expenses.

Each of these investments came from the same discipline — waiting patiently for quality to get mispriced, then acting boldly when it does. This is the essence of how we operate: conviction through dislocation. Tesla is simply the latest expression of that philosophy.

We initiated our position at roughly $235 per share, investing about 8% of our capital at cost. Since then, the stock has appreciated roughly 75%, and it now represents around 12% of our portfolio — quickly becoming the third-largest position in the fund. While we never anchor our conviction to short-term price moves, that early performance serves as a reminder that markets occasionally offer brief windows of mispricing — and that our job is simply to act with conviction when they do.

We’ve followed Tesla for years. In fact, we first studied it deeply back in 2020 after reading Ashlee Vance’s biography of Elon Musk. I remember being mesmerized by Musk — a rare combination of vision, determination, extreme focus, and relentless work ethic that sets him apart even among the greats like Jobs, Bezos, Gates, and Zuckerberg. His vision often feels as if it came straight out of a science fiction novel — and yet, he always finds ways to make it real.

Back then, Tesla was still a car company — capital-intensive, vulnerable to macro shocks, and far from the multi-layered moats it has since built. Our admiration for Musk’s brilliance wasn’t yet matched by conviction in the business’s long-term durability. That patience cost us a tenfold gain. Mr. Market can be a tough teacher — and he charges full tuition, upfront. But it bought us something more valuable: perspective. It taught us that timing and conviction must align — and that a true understanding of a business’s moat takes years to mature.

Fast forward to today: Tesla has evolved into one of the most formidable and strategically advantaged companies in the world — combining manufacturing excellence, data dominance, and real-world AI leadership in a way no other company has achieved. What once looked like a car company now resembles a vertically integrated technology and energy platform with multiple self-reinforcing moats.

Tesla’s Multi-Layered Moat

1. Manufacturing Scale & Integration — The Foundation

Tesla’s manufacturing advantage is the foundation of everything else. The factory itself is the product — a masterpiece of vertical integration and engineering efficiency. From gigacasting and structural battery packs to “Dojo-in-the-loop” manufacturing optimization, Tesla builds what no one else can replicate at scale.

Most competitors are still in the “production hell” Tesla survived years ago. The result is a cost structure and speed of innovation that traditional automakers can’t match. This isn’t just a car company — it’s a manufacturing flywheel compounding know-how and efficiency every quarter.

2. The Data Flywheel (FSD & AI) — Tesla’s Brain

With over six million vehicles on the road feeding billions of miles of real-world driving data into Tesla’s neural networks, the company has built the largest autonomous-driving dataset on Earth — a compounding advantage that grows stronger every day. Each mile driven improves Tesla’s Full Self-Driving system, which makes the cars safer and more capable, attracting more drivers, generating more data — the essence of a flywheel.

Tesla’s proprietary AI stack, powered by Dojo, processes an ocean of video data to train neural networks that handle the unpredictable situations human drivers face daily. Unlike competitors relying on synthetic data or geofenced testing, Tesla learns in the real world, from the real world.

To understand the economics, consider utilization. A typical car is used only 10 hours per week out of 168 — roughly 6% of the time. Once fully autonomous, that same vehicle could operate 50 to 60 hours a week, delivering passengers by day and cargo by night. As Musk put it: “A car that used to sit idle 90% of the time can now work for you while you sleep. That increase in utilization could represent the largest asset value increase in human history.”

Tesla’s advantage isn’t just data — it’s approach. Competitors like Waymo rely on expensive sensor suites and low-volume production, which makes their systems economically unscalable. Musk noted: “Waymo’s cars cost four or five times more to make and are produced in tiny quantities. Tesla’s cost 20–25% as much and are made in the millions.”

That’s why Tesla’s AI improves exponentially faster. Every car on the road is a data-gathering node that makes the system smarter.

Tesla has even solved the hardest edge cases — driving toward direct sunlight, in fog, or at night — using a “direct photon count” approach that bypasses traditional image processing. As Musk explained, “We can see in what appears to be the blackest of night, and through fog, probably better than the average person.”

This combination of scale, cost efficiency, and technical mastery gives Tesla a moat few companies in history can match.

3. Distribution & Ecosystem Lock-In — The Network

Tesla’s direct-to-consumer model keeps its brand and customer relationships unmediated by dealers. Its global Supercharger network — now becoming the standard even for competitors — adds another layer of lock-in. Every Tesla on the road is a connected device receiving over-the-air software updates, FSD upgrades, and app-based integrations. This creates network effects and switching costs that compound over time.

4. Brand & Aspiration — The Emotion

Tesla isn’t just an automaker; it’s a cultural symbol of progress and innovation. Like Apple, it evokes status and emotional connection — customers don’t just buy a Tesla, they join a movement. That kind of brand power is rare and deeply durable.

5. Platform Optionality — The Future

Tesla’s final layer of advantage lies in its expanding platform. Full Self-Driving and the future robotaxi network could transform every Tesla from a depreciating asset into an income-producing one. Energy storage and Megapacks extend the business into the global power grid, while Optimus — Tesla’s humanoid robot — pushes its AI and manufacturing capabilities into entirely new industries. Musk has stated that ~80% of Tesla’s value will be Optimus humanoid robots, and that he believes Optimus will be the biggest product of all time by far.

Crucially, Tesla’s decision to operate its own robotaxi network — instead of partnering with Uber — further strengthens that moat. It’s classic Musk: vertically integrate everything that matters. Uber’s business model depends on paying human drivers, who capture roughly 75% of every fare, while Tesla’s robotaxis eliminate that cost entirely. Without drivers, Tesla’s cost per mile collapses, allowing it to offer cheaper rides while earning superior margins.

For context, Uber today has about six million active drivers and couriers globally — translating to only a few million cars on the road at any given time, most of which sit idle for roughly 90% of the week. Once autonomous, Tesla’s vehicles could operate five to ten times more hours per week — say, 50 to 60 hours instead of 10 — effectively turning 400,000 robotaxis into the capacity of two million traditional vehicles. Combine that with zero driver costs and no 25–30% platform fee to Uber, and the economics tilt decisively in Tesla’s favor.

By controlling the full stack — manufacturing, software, and network — Tesla keeps the economics, pricing power, and customer relationship entirely in-house. That vertical integration gives Musk freedom to experiment with ultra-low pricing, even to the point of making car ownership unnecessary. His goal isn’t to participate in Uber’s model — it’s to make it obsolete.

If Tesla executes on this vision, it could become one of the most valuable companies in history — perhaps, as Musk said, “worth more than the next five companies combined.” That may sound audacious, but so did reusable rockets, mass-market EVs, and landing boosters on drone ships — until he made them real.

Most great companies have one primary moat. Tesla is building at least five, all reinforcing one another. That’s why it could become one of the widest and most durable competitive moats of our era — more akin to a modern-day Standard Oil or Apple than to a traditional automaker.

In Tesla, we see the rare combination of visionary leadership, structural advantage, and compounding potential that defines the investments that built Rowan Street.

Reallocation from Spotify to Tesla

In the first half of 2025, we continued trimming our Spotify position and reallocated the proceeds into Tesla. Spotify remains a strong founder-led compounder and continues to execute well. However, at current valuations, much of Spotify’s expected growth and margin expansion already appear well reflected in the stock. While we continue to hold a core position in Spotify, we view its competitive advantages as relatively stable rather than expanding meaningfully — especially when compared to the scale and optionality of Tesla’s opportunity set.

Tesla, by contrast, stands out as one of the most exceptional businesses of our time — led by the most extraordinary entrepreneur of our lifetime, whose vision and relentless execution are driving breakthroughs across autonomy, AI, energy, and robotics. We established the majority of our position back in March and added further in mid-August as our conviction continued to deepen.

We’ve owned Spotify for more than seven years and have developed a deep understanding of its business, its moat, and its management. It remains a very good company — but Tesla is a truly great one. In our view, Elon Musk is building one of the widest and most consequential moats in business history, and that’s exactly the kind of opportunity that deserves to sit at the center of our portfolio.

Looking Ahead

At Rowan Street, our goal has never been to attract the most investors — only the right ones. We’re building something rare in today’s markets: a focused, high-conviction, and deeply aligned investment partnership designed to compound capital over decades, not quarters.

Our edge has always been temperament — patience when others rush, conviction when others doubt, and discipline when others chase. The partners who choose to join us understand that great results require time, trust, and alignment. Compounding works best when everyone at the table shares the same long-term mindset.

As we enter the next chapter of our journey, our ambition is not necessarily to become very big — though we certainly wouldn’t mind if our fund (and our wallets) grew along the way. The real goal is to keep refining what makes Rowan Street special: deep alignment, trusted relationships, and exceptional long-term results.

If you share our philosophy — if you think in decades, value simplicity over noise, and believe in the quiet power of long-term ownership — we invite you to grow with us. The next chapter of Rowan Street will be written alongside our partners — thoughtful, long-term investors who share our values and belief in what we’re building together.

Thank you for your continued trust, partnership, and patience. It is a privilege to grow your capital alongside our own.

Warm regards,

Alex & Joe

If you enjoyed this letter, you can find all of our past writings and learn more about our investment philosophy at www.rowanstreet.com.

DISCLOSURES

The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot ensure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees.

Dear Partners,

The first half of 2025 has been another strong period for Rowan Street. As of June 30, our fund is up +20.1% (net of fees) year-to-date, capping off a remarkable three-year run. Since mid-2022, we’ve compounded capital at approximately 51.7% (net) annually, delivering a +249% cumulative return. These are rare numbers, and while we don’t expect this pace to continue indefinitely, we believe it’s a powerful reflection of what’s possible when our investment philosophy is applied with discipline and patience.

This recent performance wasn’t the result of chasing fads or playing short-term games. It was earned by sticking to our process — one that has been sharpened over time through experience, mistakes, and reflection. Today, we run what we believe is our strongest and most focused portfolio to date, anchored by a small group of exceptional businesses and run by world-class entrepreneurs and owner-operators.

You can see our annual performance since inception and our compounded returns in the table below:

While our since-inception Internal Rate of Return (IRR) stands at approximately 9.4% (net), the long-term returns on each of our core holdings — all compounding at over 20% annually (see table below) — offer a more accurate reflection of the strength of our current investment process and the discipline we’ve built over the years. As we shared in our 10-Year Anniversary Letter, this evolution was shaped by experience and a few hard-earned lessons. But more than anything, it’s been our unwavering commitment to our guiding principles that has anchored us — and that discipline is now showing up in the results.

These principles are not just aspirational values — they’re the foundation of how we invest and the compass we follow every day. And they’re the reason our portfolio is now compounding the way we’ve always envisioned.

Our Portfolio: Long-Term Compounding in Action

Listed in the table below are our core holdings, sorted by the length of our holding period. As you can see, we have been shareholders of Meta Platforms (META) and Spotify (SPOT) for over 7 years — a holding period that we aim for when we make an initial purchase. Our internal rate of return (IRR) on both investments has exceeded 20% annually.

Netflix (NFLX) and The Trade Desk (TTD) have been in the portfolio for over 5 years and have delivered truly, in our opinion, spectacular returns. Topicus (CVE:TOI) and Shopify (SHOP), which we’ve owned for just over 3 years, have each compounded at over 22% annually — strong outcomes we believe are the result of thoughtful entry points and durable business quality.

Adyen (ADYEY) and Dino Polska (WSE:DNP) are our more recent investments, and both have worked out well so far. But as with all long-term investments, only time will tell whether they can live up to the high compounding bar set by our earlier holdings.

These are the types of businesses you don’t find often — and the opportunity to acquire them at a sensible price comes along only rarely. When you do, you let them run. That is the essence of our approach: to patiently compound capital by partnering with what we believe to be great businesses — and with some of the world’s best entrepreneurs and owner-operators — not by reacting to headlines or jumping from one narrative to the next.

Holding a Multi-bagger in a Portfolio

To kick off this section, we want to share a post from Ian Cassel (a respected professional investor and founder of MicroCapClub) that perfectly captures what it really takes to hold onto a multi-bagger:

This resonates deeply with our experience. Two of our longest-term holdings — Meta Platforms and Spotify — have each compounded at over 20% annually and generated over 4x returns for our fund over 7+ years. But the journey to those returns was anything but smooth.

Meta (META) saw a 40% drawdown early in our holding period, and then again dropped a staggering 75% in 2022 as sentiment around the business turned sharply negative. Conviction was tested. Headlines were brutal. Yet, we held on, grounded in fundamentals and our understanding of the business. At the time, we shared our perspective publicly in this article on Seeking Alpha: Does a $750 Billion Decline in Meta’s Market Cap Make Sense?, making the case for Meta when few wanted to touch it. That thesis was ultimately validated — Meta has since appreciated more than 7x from those lows, becoming one of the top contributors to our long-term performance.

Spotify (SPOT) might have been even more psychologically challenging. We first invested in 2018, and for a time the stock advanced meaningfully — only to then drop over 75% during the brutal 2022 drawdown. By 2023, five years into our holding period, our cumulative return on the position had round-tripped to zero. Imagine holding a company you deeply believe in for half a decade — and having nothing to show for it on paper. That’s a true test of conviction.

At the time, we published this article on Seeking Alpha: Spotify: A Favorite Idea That’s Extremely Mispriced, laying out our thesis while the stock was deeply out of favor — a thesis that ultimately proved to be both accurate and highly rewarding. From those 2022 lows, Spotify went on to appreciate nearly 10x, powerfully validating the discipline to stay the course.

Holding a multi-bagger isn’t about being right once — it’s about staying right long enough to make a meaningful impact on your long term track record.

Why We Exist — and Where Our Edge Lies

This is why we exist. Not just to identify the rare, extraordinary businesses worth owning — but to actually hold them through the emotional and psychological gauntlet that causes most investors to self-sabotage.

That kind of discipline — to sit still while the market tests your thesis, your patience, and your identity — we believe, is more valuable than any financial model, algorithm or forecast. And that, more than anything else, is our edge.

It’s the same edge we described in our 10-year letter this past March — and it bears repeating:

“We have no edge in predicting the economy, the Fed’s next move, or the stock market’s short-term direction. We’re not trying to call bottoms or tops, use leverage, trade options, or rotate between sectors. Our edge is in identifying greatness, buying it at fair prices, and then having the temperament to hold through the storms — while everyone else is losing their heads.”

We’re not here to be the smartest guys in the room. We’re here to avoid stupidity, stick to our process, and let time and compounding do the heavy lifting.

Our Edge in the Age of AI

In a world increasingly shaped by AI, it’s fair to ask whether this kind of edge — grounded in temperament, judgment, and long-term thinking — will still hold. We believe it will, perhaps more than ever. While AI can help investors process information faster, identify patterns in vast datasets, and even assist in building models, it doesn’t change human psychology. It won’t eliminate fear, greed, or the temptation to overreact.

AI might make the game faster and noisier, but it won’t change the rules of compounding. And in a world where everyone has access to the same data, models, and advanced tech, the differentiator is no longer who knows more — it’s who behaves better.

Looking Ahead

At Rowan Street, we’ve always believed that how you earn your returns matters just as much as the returns themselves. We’re not trying to build a hot streak. We’re building a long-term track record — one that’s earned through patience, discipline, and deep alignment with the businesses we own and the partners we serve.

As we look to the future, our ambition is to grow Rowan Street into a world-class investment partnership — not just in terms of size, but in the quality of the capital we manage and the relationships we build. Our long-term goal is to scale to $100+ million in assets, but we are committed to doing so the right way: one thoughtful, aligned partner at a time.

If you know investors who share our values — those who think in decades, not quarters; who care more about business fundamentals than headlines; and who want to be true partners in a long-term compounding journey — we would love to talk.

Thank you for your continued trust, partnership, and patience. It is a privilege to grow your capital alongside our own.

Warm regards,

Alex and Joe

DISCLOSURES

The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot ensure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees.

A decade in investing is more than just a milestone—it’s a test. It’s a test of patience, of conviction, and of the ability to stay the course when everyone around you suggests otherwise. Over the past ten years, we’ve experienced euphoric highs, painful lows, and everything in between. We’ve made mistakes, learned invaluable lessons, and refined our investment philosophy through both triumphs and setbacks.

On this special occasion, we don’t just want to look back—we want to distill the essence of our journey into one cohesive narrative. This letter is our story. It’s about the lessons that shaped us, the principles we live by, and the path we’re charting for the decades ahead.

Table of Contents

1. The Birth of Rowan Street: (2015–2017: The Formative Years): How the fund was founded and the early years of survival.

2. The Breakout (2018–2021): Finding Our Stride – Embracing long-term ownership and refining our investment philosophy.

3. The Crucible (2021–2022): Our Biggest Test – Navigating the most challenging period in our history and staying the course.

4. The Rebound (2023–2024): The Power of Staying the Course – How discipline and patience led to an extraordinary recovery.

5. Key Lessons from a Decade of Investing

6. Looking Ahead: The Next Chapter of Rowan Street – Why our principles remain unchanged and what the future holds.

The Birth of Rowan Street

In late 2014, after more than a decade managing over $1 billion in assets for high-net-worth clients at top-tier Wall Street firms, I made the most consequential decision of my career: I walked away from the stability of my Private Wealth Management career to start an investment fund from scratch. No salary. No guarantees. Just a deep conviction that we could build something different.

But the seed for Rowan Street was planted much earlier. Back in 2002, reading Robert Hagstrom’s The Warren Buffett Way gave me something rare: clarity of purpose. I suddenly knew exactly what I wanted to do with my life.

Of course, that clarity didn’t come with an instruction manual on how to become a great investor. It also didn’t come with capital, connections, or any shortcut to success. I was a newly minted USC graduate working as a junior portfolio analyst on Wall Street, armed with nothing but an ambitious dream and a bookshelf full of Buffett’s writings.

Fast forward to 2014, and fate intervened. While attending a training course in Seattle, I reconnected with Joe Maas, whom I’d met years earlier while pursuing the CFA designation. Most CFA candidates bond over shared misery, but Joe and I clicked because our conversations always veered beyond that—we’d dive deep into investing and, more importantly, talk about the kind of fund we’d love to run someday.

One evening, over drinks (never underestimate the power of a good cocktail), we sketched out the blueprint for what would become Rowan Street—on the back of a napkin, no less.

A week later, I quit my job, cashed out my savings, and teamed up with Joe to launch Rowan Street. We started with our own capital, no outside investors, no fancy office, and no guarantees. Just two guys with a bold vision and an unshakable belief in a simple but powerful approach:

• Find great businesses led by exceptional people.

• Buy them at a fair price.

• Let time and compounding do the rest.

The Early Years: Survival Mode

Starting a fund with a small pool of personal capital and no institutional backing is extremely rare in the investment world—and surviving the early years is incredibly difficult. We had no deep-pocketed backers, no fancy office—just our own money and a few close friends and family who believed in us.

We had to be incredibly disciplined. No office. No Bloomberg terminal. No analysts. No expensive research subscriptions. I ran the fund from my apartment, devouring annual reports like they were bestsellers. Passion was a driving force, but so was the very real fear of having to move back in with my parents. Every dollar mattered, and we operated the fund with the same frugality we applied to our investments.

At times, it felt like the odds were stacked against us. But those early struggles shaped the foundation of Rowan Street. We weren’t just launching a fund; we were forging the habits that still define us today:

• Think and act like business owners. We don’t trade stocks—we own businesses.

• Filter out the noise. Great companies aren’t derailed by a bad quarter or a Fed announcement.

• Let compounding do the work. Instead of constantly tinkering, we focus on time and patience—two of the most powerful forces in investing.

Back then, it didn’t feel like we were building an investment philosophy; it just felt like survival. But looking back now, we wouldn’t change a thing. The struggles of those early years weren’t setbacks at all—they were training. They taught us patience, resilience, and the discipline to focus on what truly matters.

2015–2017: The Formative Years

In those first few years, we focused on building a strong foundation—refining our processes, testing our investment framework, and honing our discipline. We were thoughtful in our approach, but like any investors, we had a lot to learn.

During this time, we invested in a number of high-quality businesses, many of which turned out to be exceptional long-term performers:

• Bank of America (BAC) – 3x since purchase

• Booking Holdings (then Priceline) – 4.2x

• Dick’s Sporting Goods (DKS) – 6.3x

• McKesson (MCK) – 4.2x

• Novo Nordisk (NVO) – 3x

While we had a good eye for great businesses, one key lesson from this period reshaped our approach: we learned to tune out macroeconomic noise and focus on what truly drives long-term compounding.

Lesson #1: Ignore the Noise – Focus on What You Can Control

When we first started Rowan Street, we made a common but costly mistake—one that nearly every investor makes at some point. We worried too much about what the market might do, instead of focusing on what we could control.

In 2015, Wall Street was full of warnings that the bull market was on its last legs. The pundits sounded smart, their arguments were persuasive, and the instinct to “play it safe” was strong. We fell for it. A perfect example was our early investment in Booking Holdings (then Priceline). It was a high-quality, asset-light, cash-generating business with strong network effects—exactly the kind of company we love to own. But after it rose ~40%, we sold, fearing that an economic slowdown would hurt travel demand. Had we simply held on, that stake would have grown roughly 4.2x (about a 17% annual return).

That experience drove home one of Peter Lynch’s most famous lessons:

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.”

We’d read those words before starting Rowan Street, but investing isn’t truly learned from books—experience is the real teacher. It’s one thing to understand a lesson intellectually; living through it is another. Selling a great business too early—only to watch it compound many times over—is a mistake you don’t forget.

From that point on, a guiding principle was born: Ignore market predictions and stay focused on the businesses themselves. We don’t claim to know where the market will be next month or next year. What we do know is how to identify high-quality, well-run businesses that can compound capital at double-digit rates over the long run. Those are what we focus on, and we let the market do what it will.

Lesson #2: The First Rule of Compounding – Don’t Interrupt It Unnecessarily

In the beginning, we still operated with a classic value investing mindset: buy a dollar for 50 cents, then sell when it approaches intrinsic value. As soon as a stock reached what we thought was “fair value,” we’d exit and move on to the next undervalued idea. This led to high portfolio turnover and a relentless hunt for new bargains. It occasionally produced decent trades, but over time we realized we were optimizing the wrong thing.

Charlie Munger put it best:

“If you buy something because it is undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That’s hard. But if you buy a few great companies, then you can sit on your ass. That’s a good thing.”

Simple as it sounds, it took us years to fully internalize that wisdom. Looking back at our letters from 2015–2017, it’s clear how much time and energy we spent chasing the next ‘cheap stock’—constantly jumping from one opportunity to the next.

In hindsight, that approach never really suited us. We’ve found that when valuation is the overriding driver of interest, we’re prone to get involved in challenging businesses or complicated ideas and liable to confuse a statistically cheap price with a margin of safety. Instead of fixating on valuations and bargain-hunting, we should have been devoting our time to studying great businesses led by great entrepreneurs. That was always meant to be our edge!

Another painful lesson from this period was over-optimizing expected returns. We would sell stocks that had become “fully valued” and swap into others we thought had more upside. It felt savvy at the time, but in reality we were often forfeiting potential 3–5x long-term gains on the businesses we sold.

For example, take Chipotle (CMG). We sold our shares after an 80% gain in 6 months holding period, patting ourselves on the back on a great trade—only to watch Chipotle go on to compound 9x in the ensuing years. Ouch.

Compounding only works when you let it. We eventually realized that our real job is to buy right and then to hold on. That sounds easy, but in practice it requires extreme patience, discipline, and an unwavering belief in the businesses we own. The power of compounding can only unfold if it remains uninterrupted.

Had we simply done nothing—held onto Chipotle, Booking, and others—we would have dramatically outperformed our more active strategy. Selling early, trading too often, and focusing too much on valuation over quality all reinforced a core belief that now defines our approach: Find truly great businesses, buy them at reasonable prices, and let them do the work over time.

2018–2021: The Breakout – Hitting Our Stride

By 2018, Rowan Street hit an inflection point. In the years prior, we had refined our approach, learned from our early mistakes, and gained a clearer understanding of what truly drives long-term compounding. This was the period where we fully embraced our investment philosophy—not just in theory, but in practice.

Looking back, 2018–2021 was a time of great progress and critical lessons. We delivered a 27.5% annualized return (21% net of fees) from December 2017 through June 2021, a testament to the power of owning a concentrated portfolio of exceptional businesses. But more important than the numbers was how our thinking evolved.

Lesson #3: Stay Within Our Circle of Competence — Yet Stay Curious

In Rowan Street’s early years, we made a costly error: we automatically dismissed companies that didn’t fit our mental model of a “great investment.” Because of that, we passed on Amazon, Google, Netflix, Apple—some of the greatest compounders of our time—without even giving them a fair shot.

Why did we ignore them? Because we were heavily influenced by Buffett’s historical avoidance of tech. Our playbook was built on Graham-and-Buffett principles, and we assumed those tech giants were too unpredictable, too reliant on constant innovation, and too hard to value. Instead of trying to understand them, we tossed them in the “too hard” pile and moved on.

The irony was that these companies dominated my daily life:

• I used Google search every day around the time of its 2004 IPO.

• I joined YouTube in 2006 (even met co-founder Steve Chen once when working from a coffee shop in San Francisco).

• I bought the first iPhone in 2007.

• By 2011, I was streaming movies on Netflix.

• I joined Facebook in 2010 and was an early Instagram user.

• Living in San Francisco, I relied on Uber and Lyft to get around.

• Later, in Seattle, Amazon’s packages filled my apartment mailroom and their headquarters rapidly rose across the street.

These weren’t abstract businesses we couldn’t grasp—we were literally living inside their ecosystems. Yet we ignored them as investments because they didn’t fit our traditional value framework.

It wasn’t until the summer of 2017, when we read Modern Monopolies by Alex Moazed, that we realized how much we had been missing. We had dismissed an entire category of world-changing businesses without even attempting to understand them. We learned that the biggest mistake isn’t passing on an opportunity—it’s never bothering to understand it in the first place. Now we follow a simple rule: you don’t have to invest in an idea, but before you say no, you must make an effort to understand what’s behind its success. You can always toss something in the “too hard” pile—but only after you’ve done your homework.

We still firmly believe in staying within our circle of competence. But we’ve learned that part of our job as investors is to expand that circle over time. It’s a delicate balance: you don’t want to fool yourself into thinking you understand something when you don’t — the most important three words in investing might be “I don’t know”. At the same time, you shouldn’t dismiss great businesses just because they don’t fit an old model.

After this wake-up call, we dived into studying platform businesses, network effects, and the competitive advantages of modern “tech monopolies.” We read extensively about companies like Facebook, Amazon, Google, Alibaba, Tencent, Netflix, Airbnb, Uber, and Tesla. We discovered that many of these companies actually met the very criteria we had always looked for:

• Expanding competitive moats and long growth runways.

• Passionate, founder-led management teams with significant ownership stakes.

• A proven ability to reinvest capital at high rates of return.

By 2018, we finally took action. We invested in Facebook and Spotify (which we still hold today), as well as initiated positions in Alibaba, Tencent, DocuSign, and Zillow. In hindsight, jumping into so many “new economy” names at once was aggressive—a more gradual approach might have been wiser. But it marked a pivotal shift in our philosophy.

Many of these investments weren’t just high-growth tech plays; they were the modern equivalents of Buffett’s old monopolies—built on digital platforms instead of physical infrastructure.

That realization changed our approach. The world changes, industries evolve, and investing frameworks must adapt. The ability to keep learning and questioning our assumptions has become one of our most important competitive advantages.

Lesson #4: The Art of Building a Position — Balancing Conviction and Prudence

Another hard-earned lesson during this period was learning how to build investment positions the right way—finding the balance between conviction and prudence. Earlier in our career, we made mistakes on both ends of the spectrum. Sometimes we’d identify a great business, do extensive research, build strong conviction… and then take only a 1–3% position—too small to make an impact even if we were right. Other times we’d put too much capital into a single idea too early—before the company had truly earned that level of trust.

Through experience, we learned that even if everything looks great on paper, time needs to confirm the thesis. If a business is truly exceptional, it will prove itself over the years. There’s no need to rush. The most prudent approach is to start with a meaningful but modest stake and let the company earn a larger place in the portfolio over time. If the business executes well, that initial stake will naturally grow into a core holding as the stock rises. If things don’t go as planned, a smaller position means any losses are manageable.

This approach also helped us overcome a psychological hurdle: the fear of “paying up” for quality. Some of the best investments we missed weren’t because we failed to spot a great company, but because we were waiting for a perfect price that never came. By starting with a modest position, we ensure we’re at least on board. If the stock pulls back later, we can always add more. If it takes off straight away, we’re already in the game rather than watching from the sidelines.

Another key realization was that the best portfolios tend to concentrate themselves over time. The winners naturally become a larger share as they grow, and the losers fade away. Early on, we felt the need to actively manage position sizes—trimming winners to “lock in gains” and averaging down on under-performers. Now we’ve learned to let great businesses earn their place. If a company is compounding value at an exceptional rate, why artificially cap its growth? It would be akin to asking Michael Jordan to swap places with someone else on the team because he has become so important to the game.

Lesson #5: The Power of Saying NO — Finding Excellence and Letting It Compound

One of the most valuable lessons we learned during this period was the true power of long-term ownership. Compounding is incredibly powerful, but only if you allow it to work uninterrupted. The temptation to chase the next opportunity is always there—there’s always another stock that looks “cheap” or a new idea that seems exciting. Yet more often than not, the best move is to stick with what you have and do nothing.

Early on, we didn’t fully appreciate that. We operated with the mindset that we needed to constantly optimize our portfolio—always rotating capital into the next “better” idea. We learned the hard way that great businesses don’t need to be traded around; they need to be owned.

For instance, years ago we owned outstanding companies like Chipotle (CMG) and Tractor Supply Co. (TSCO)—businesses with durable advantages, strong management, and long growth runways. In hindsight, they’re exactly the kind of companies we aim to hold for decades now. But at the time, we convinced ourselves we’d found something even better at a more “attractive” valuation, and we sold them.

That was a mistake. Charlie Munger said it best:

“The first rule of compounding is to never interrupt it unnecessarily.”

Selling those businesses interrupted their compounding and ran counter to the long-term ownership mindset that now defines Rowan Street. Like most valuable lessons, we had to experience it firsthand to truly internalize it.

Over the years, we’ve realized that our edge isn’t in making frequent decisions—it’s in making fewer, but higher-quality ones, by being extremely selective in our approach.” In 2023, we made just one new investment (Adyen). In 2024, again just one. Both have significantly outperformed thus far. That’s not a coincidence; that’s the result of staying patient and saying “NO” to almost everything else.

Wall Street culture demands constant action, but the truth is that exceptional businesses are rare, and opportunities to buy them at sensible prices are even rarer. Our focus is simple: buy right and hold on. It sounds easy, but in practice it requires extreme patience, discipline, and conviction.

From these experiences we distilled a guiding principle: Find Excellence, Buy Excellence, Add to Excellence over time; Sell Mediocrity. In a lifetime of investing, a few extraordinary businesses held patiently will account for the majority of success. The key isn’t chasing the next idea—it’s sticking with the extraordinary ones you’ve already found.

July 2021 – December 2022: The Crucible that Defined Us

The 18 months from mid-2021 to the end of 2022 were, without question, the most brutal chapter of our investing career—and by extension, of Rowan Street’s journey.

The growth stocks that formed the core of our portfolio—the companies we had painstakingly selected and believed in—were absolutely crushed. It wasn’t a brief dip; it was a relentless, year-long collapse.

Markets have a cruel way of making even seasoned investors feel like idiots in the short term, and this episode was no exception. Our portfolio was filled with companies that were fundamentally strong, yet their stock prices told a very different story.

As pessimism spread like wildfire, growth stocks became pariahs in the market’s eyes. Valuations cratered. Sentiment turned brutal. It felt like we were fighting against an overwhelming tide—one that had drowned many before us and was threatening to drown us as well.

And then there was the psychological weight of it all. Unlike large fund managers who collect hefty fees regardless of performance, our compensation is 100% performance-based. If we didn’t recover, we weren’t going to see a paycheck for years—if ever. The uncertainty was suffocating.

But giving up was never an option.

When everything around you is screaming “capitulate,” conviction matters more than ever. Our singular focus in that period became very clear: rebuild the capital we’d lost for our investors. We doubled down on our process, leaned into the storm, and refused to flinch.

The Market Gave Up on Meta and Spotify — We Didn’t

At the depths of the selloff, some of our highest-conviction holdings were being completely abandoned by the market. Meta (formerly Facebook) was trading as if it were a failing business. By November 2022, Meta’s market cap had imploded by over $750 billion—three-quarters of its peak value erased. The narrative couldn’t have been more negative: the market was convinced that Zuckerberg’s metaverse vision was a multi-billion-dollar folly. Advertisers were pulling back, competition from TikTok was intensifying, and Meta’s stock was priced as if the business were in terminal decline.

But the fundamentals told a different story. Meta still had 3.7 billion users across its platforms (Facebook, Instagram, WhatsApp). It was generating tens of billions in free cash flow. And importantly, Zuckerberg responded to the crisis by aggressively cutting costs and refocusing on core business efficiency.

We even wrote a commentary at the time titled “Does a $750 Billion Decline in Meta’s Market Cap Make Sense?” to highlight the disconnect between perception and reality. Meta wasn’t broken; the market’s perception of it was. So we held our ground.

Spotify was another battleground. By mid-2022, Spotify’s stock had plummeted 80% from its highs, trading at levels that implied investors saw no profitable future for the company. Critics argued that Spotify had no pricing power and was at the mercy of the record labels. Its big investments in podcasting were derided as a $1+ billion mistake. In short, the market viewed Spotify as just another struggling tech name, not the dominant audio platform it actually is.

But we had done our homework. Spotify possesses one of the most powerful network effects in digital media. At the time, it had over 200 million paying subscribers and close to 500 million monthly users. Its margins were about to improve as it optimized content costs. And it had built a massive lead in the still-nascent audio advertising space. We wrote a commentary at the time titled: “Spotify (SPOT) is currently selling for about $15 billion. Does this make any sense?”Again, the market saw decline where we saw opportunity. We held on.

The Hardest Decision: Do Nothing

When the world gives up on a great business, it’s easy to follow the herd. But that’s not how compounding works. Had we listened to the noise, given in to fear, tried to time the market, and sold Meta and Spotify at the bottom, we truly believe we wouldn’t be here telling this story today. Instead, we stuck to our process and continued owning our best ideas.

By the end of 2023, both Meta and Spotify had rebounded more than six-fold from their lows. This wasn’t luck. This was patience and conviction doing their work.

Why Did You Stick With It?

People often ask us: Why did you stick with it? Why go through three years with virtually no paycheck? The answer is simple: This is the only thing I’ve ever wanted to do.

Ever since I read The Warren Buffett Way as a 22-year-old, I knew this was my path. Rowan Street isn’t just a business venture—it’s my life’s work. That fire—that deep-seated belief in what we’re building—is why we’re still here. Now, as we mark our 10-year milestone, I can say with confidence: that crucible didn’t just test us, it defined us.

2023–2024: The Rebound – The Power of Staying the Course

If 2021–2022 was our greatest test, then 2023–2024 has been proof that patience pays. Our principles weren’t just theories on paper—they were battle-tested, and they won.

Recoveries never happen in a straight line, and 2023 was no exception. For much of that year, uncertainty remained high. Many of the same investors who panicked on the way down were hesitant to believe in the rebound. Doom-and-gloom headlines persisted, and plenty of skeptics insisted that the best days of growth investing were over.

But we held on to what we had always known: the businesses we owned were fundamentally sound. Meta slashed expenses and refocused on efficiency. Spotify proved it’s not just a beloved product—it can be a very profitable business too. Shopify streamlined its operations, cut costs, and returned to profitability.

While sentiment was slow to catch up, these companies were getting fundamentally stronger. Eventually, the market noticed. By the end of 2023, our patience was dramatically rewarded:

• Rowan Street Capital: +102.6% net return for the year.

• Meta (META): +194% in 2023.

• Spotify (SPOT): +138%.

• The Trade Desk (TTD): +60%.

• Shopify (SHOP): +124%.

That momentum carried into 2024, as we continued compounding with a +56.6% net return. Our core holdings kept reaffirming their competitive positions and executing well.

But let’s be clear—was this the result of some brilliant macro call? Did we perfectly time the market? Do we have some special insight into the Fed’s next move or the direction of the economy? Absolutely not.

Our success wasn’t about forecasting—it was about discipline. We did exactly what we said we would do:

• We stuck with the businesses we believe in.

• We tuned out the noise.

• We let compounding do the heavy lifting.

That’s it. No magic formula, no market predictions—just patience, conviction, and time doing its work.

It turns out that the hardest thing to do in investing—staying still while the world around you is panicking—is also the most profitable thing you can do.

In 2022, when the world was telling us to run for the exits, we stayed put. It wasn’t easy (it never is), but in hindsight, the greatest returns often emerge from the moments of greatest doubt. The best opportunities usually feel uncomfortable in real time, but they look obvious in hindsight. This is why we keep our fund concentrated. It’s why we say ’NO’ to almost everything. It’s why we don’t let macro predictions dictate our decisions. And it’s why, when the next bear market inevitably comes, we won’t flinch.

The businesses we own today are stronger and more profitable than they were three years ago. They’re still led by exceptional management teams. They still have massive opportunities ahead of them. And they’re still compounding value at a rate that makes any short-term price decline nothing more than a footnote in their long-term story.

Looking Ahead: The Next Chapter of Rowan Street

As we reflect on the past decade, one thing is abundantly clear: investing is a lifelong journey. It’s not about one great year, or even a great decade—it’s about the ability to learn, adapt, and evolve over a lifetime. The best businesses compound over decades. The best investors do, too.

Our journey so far has reinforced what we’ve always believed: patience, discipline, and long-term ownership are true game-changers in this business. We’ve weathered cycles of euphoria and despair, learned from our missteps, and strengthened our investment process along the way. What has never changed is our unwavering commitment to compounding our capital alongside our investors – we’ve always had our own money in the fund, right next to yours. We will always be in the same boat.

We are profoundly grateful to our partners—both old and new—who have entrusted us with their capital and shared our vision. It takes a rare kind of investor to stick with a long-term strategy when the market tempts you every day with short-term noise. Your trust and patience have allowed us to do what we do best: focus on the long term, ignore the distractions, and invest in truly exceptional businesses.

Looking ahead, we feel more confident than ever about the road before us. The principles that guided us through the highs and lows of the past ten years will continue to serve as our foundation for the next ten and beyond.

What Investors Can Expect from Rowan Street

After a decade of managing capital through all kinds of market environments, we have a deep understanding of what we are good at—and what we are not. At the risk of sounding redundant,

• We have no edge in predicting the economy, the Fed’s next move, or the stock market’s short-term direction.

• We’re not adept at calling exact market bottoms or tops.

• We don’t trade frantically, nor do we use leverage, options, shorting, or complex hedges to try to time the market.

• We don’t rotate between sectors or chase whatever’s “hot” at the moment.

Where we do have an edge is in identifying greatness. Our strength lies in recognizing exceptional businesses run by exceptional owner-operators, buying them at fair prices, and then getting out of their way to let time and compounding work their magic. We are very good at being patient, being disciplined, and saying ‘NO’ to almost everything that doesn’t fit our very strict investment criteria.

Wall Street analysts are incredibly smart—many can build more elaborate models or have deeper knowledge of minutiae. But we understand something they sometimes overlook: human nature. Investing isn’t just about numbers; it’s about temperament. It’s about having the discipline to hold onto great businesses when others are panic-selling, and the restraint to ignore the hype when greed is running wild. As Warren Buffett once said:

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”

We don’t consider ourselves the smartest investors in the room. We just try to be consistently not stupid. We’ve spent years refining our decision-making framework, and we trust it. That’s why we can remain greedy when others are fearful, and fearful when others are greedy. After all, we’ve always been wired that way.

The Next 10 Years

Our goal remains unchanged: to build enduring wealth by compounding value over the long term, hand-in-hand with you. We will continue to do what we’ve always done—find great businesses, buy them at fair prices, and let time do the rest. It’s not flashy. It’s not easy. And at times, it can feel excruciatingly slow. But it works.

As we begin the next decade of Rowan Street, we believe we’re entering a period that could offer some of the most attractive opportunities we’ve seen in years. With fear once again gripping the markets, many exceptional businesses are trading at prices that, in our view, significantly undervalue their long-term potential. These are the moments when our approach shines—when patience, discipline, and a willingness to go against the crowd can really pay off.

For those who share our long-term mindset and believe in the power of compounding, we invite you to stay the course—or consider joining us on this journey.

The best is yet to come.

Warm regards,

Alex & Joe

DISCLOSURES

The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot ensure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees.

Dear Partners,

We are pleased to report that 2024 was an excellent year for Rowan Street, with our fund achieving a net gain of +56.6%, significantly outperforming the S&P 500’s +25.0% total return. The biggest contributors to our outperformance were Meta (+66%), Spotify (+138%), theTradeDesk (+63%), Shopify (+37%), and Netflix (+83%).

A Defining Moment and The Comeback

The past three years have been formative for Rowan Street, marked by the challenges of 2021-2022—a period that required deep reflection and, ultimately, a strong resurgence in performance. In June 2022, we outlined our refined investment philosophy in The Next Chapter for Rowan Street, reaffirming our commitment to the long-term ownership of what we believe to be a select few exceptional businesses. These businesses are led by visionary, passionate, and mission-driven leaders—preferably Founder CEOs—who act as owner-operators and treat shareholders as partners. These entrepreneurs share our long-term mindset, prioritize enduring value creation, and embody the qualities we believe are essential for extraordinary success.

Exceptional businesses are rare, and opportunities to acquire them at sensible prices are even rarer. Our focus is on buying right and holding on—a task that may sound simple but, in practice, demands extreme patience, discipline, and an unwavering belief in the underlying quality of the businesses we own.

Since the 2022 drawdown, our primary focus has been to rebuild value for our investors. We are pleased to report that Rowan Street has rebounded significantly, with our portfolio appreciating by +217% (net) since 2022—thank you for your patience and trust!

Importantly, we have not collected any performance fees since June 2021, when we last reached our High Water Mark (HWM). Our compensation structure ensures we only get paid when we deliver value to our investors—a principle we remain deeply committed to.

Notably, during this period, we maintained our investments in the same core group of companies (we will go through them in detail later in this letter), as outlined in our Next Chapter for Rowan Street letter. These businesses have continued to deliver strong business results, and the robust returns in 2023 and 2024 are a testament to their resilience and long-term compounding potential.

Our Guiding Principles

Our recent success underscores the soundness of our refined investment strategy and the foundational values that guide everything we do. Over the years, as we’ve gained experience and learned from both successes and mistakes, we’ve revisited and sharpened our approach to better reflect the lessons we’ve absorbed.

The Guiding Principles we have outlined aren’t just something nice to have on our website; they are the cornerstone of how we operate and make investment decisions. Our primary goal in refining these is to provide clear direction for future decisions, ensuring that we, as managing partners, remain grounded and avoid costly distractions. Additionally, we hope these principles will help new investors understand the philosophy driving the selection process for the companies in our portfolio. We strongly encourage you to review our updated investment framework.

Looking ahead, we are committed to managing the fund with the same discipline and focus that have defined our recent success. The lessons we’ve learned and the values we’ve solidified during this period now form the bedrock of our approach to building long-term value.

We are profoundly grateful for the trust and confidence you’ve placed in us and remain as committed as ever to compounding your capital in the years to come.

Top Five Holdings

Below, we’ve outlined the historical annual returns for the five largest holdings in our portfolio. As you’ll notice, stock prices often exhibit wild swings from year to year, driven by the ever-changing moods of Mr. Market. The emotional extremes have been particularly pronounced over the past five years. However, businesses themselves don’t change their fundamentals nearly as rapidly as stock prices suggest. Over time, the market inevitably aligns with the underlying performance of the business, even if it takes a detour or two along the way. Below, we’ll delve into the fundamentals of these companies and examine how they’ve translated into their longer-term stock price performance.

Meta Platforms (META)

Investment Initiated: April 2018

Internal Rate of Return (IRR*): 22%

*IRR represents the annualized rate of return on an investment, accounting for the timing and magnitude of cash flows over the holding period.

For META, our 22% IRR aligns closely with the company’s compounded growth in earnings per share (EPS) and free cash flow per share during the six-year holding period, as shown below:

Looking ahead, Meta is expected to grow its revenues, earnings, and free cash flow per share at mid-teens rates over the next two years. There’s a good possibility that it could exceed these estimates, considering the breadth of growth initiatives currently in place, such as advancements in AI, monetization of Reels, expansion into business messaging, and the ongoing development of the metaverse.

We’ve written extensively about Meta Platforms (META) over the past few years. For a deeper dive into our thoughts and analysis, we encourage you to review our November 2022 Note: Does a $750 billion decline in Meta’s market cap make sense? and our Q3 2023 Letter: Meta Platforms (META): $550 billion rebound in market cap in less than a year.”

Spotify (SPOT)

Investment Initiated: May 2018

Internal Rate of Return (IRR): 14%

Our IRR for Spotify, while solid, has been influenced by the timing and size of our investments. Over the past six years, the company has achieved exceptional growth in users, revenues, and gross profits—as highlighted in the chart below. However, our IRR does not fully reflect this growth due to the cash flows involved in building our position.

We began buying Spotify shares in 2018 at an initial cost basis of $135 per share but continued to add to the position over the years, ultimately raising our average cost basis to $216 per share. Had we maintained our initial cost basis, the IRR on this investment would have been closer to 22%, which better aligns with Spotify’s fundamental growth in key metrics such as Monthly Active Users (MAU), revenues, and gross profits.

In early December, we published an article titled, From $15 Billion to $100 Billion: Lessons from Our Spotify (SPOT) Investment, and we encourage you to review it for additional insights into this investment.

theTradeDesk (TTD)

Investment Initiated: March 2020

Internal Rate of Return (IRR): 54%

TheTradeDesk has been our most successful investment to date. March 2025 will mark five years since we opportunistically initiated our position at a cost basis of $17.40 (split-adjusted). Since then, TTD has appreciated more than sevenfold, delivering an annualized return of approximately 54%.

These exceptional results far outpace the company’s strong fundamental growth, with revenues and earnings compounding at approximately 25% annually over this period (refer to the table below). The primary reason for this outsized return lies in the price at which we were able to acquire TTD during the early days of the pandemic, when market fears briefly drove it down to just 10x revenues. Today, the valuation has expanded significantly to approximately 25x revenues, amplifying our returns.

This investment underscores the critical importance of opportunistic entry points. While identifying extraordinary businesses is essential, the price you pay for them does matter.

Looking ahead, TTD is expected to grow its revenues, earnings, and free cash flow at rates north of 20%. While the stock’s current valuation is lofty and reflects significant enthusiasm for the company’s long runway for growth, we believe its strong fundamentals will drive solid returns over time. Even if valuation multiples were to compress, which we expect they might, we still anticipate a solid return from our position—potentially doubling our investment over the next five years.

Shopify(SHOP)

Investment Initiated: February 2022

Internal Rate of Return (IRR): 23%

Our IRR for Shopify aligns closely with the growth in revenues and gross profits the company has delivered over the past three years since we first purchased it in February 2022 (as shown in the table below). However, the path to achieving this return has been far from smooth—as is often the case with investments.

In fact, for the first 2.5 years of holding Shopify, our position generated little to no return. Nearly all of the gains have come within the past six months. This illustrates a fundamental principle of long-term investing: the longer your holding period, the more closely your returns will reflect the underlying fundamentals of the business.

Looking ahead, Shopify is expected to grow its revenues and gross profits at rates north of 20% annually over the next two years, with cash flow from operations projected to grow in the high 20s as the company continues to convert more of its revenues into cash. While Shopify’s valuation multiples remain lofty—as they almost always do—this reflects Mr. Market’s recognition of the massive opportunity the company has in the e-commerce space. Even if market enthusiasm for Shopify’s long-term growth moderates in the coming years, which we expect it likely will, we still anticipate generating respectable double-digit annual returns from this investment.

Topicus (TOI.V)

Investment Initiated: March 2021

Internal Rate of Return (IRR): 16%

As a reminder, Topicus is a Dutch company that acquires, manages, and builds vertical market software (VMS) businesses, primarily in Europe. These businesses provide mission-critical software solutions tailored to the specific needs of customers within particular vertical markets. Topicus was spun off from Constellation Software, a Canadian company, in February 2021. It was established as an independent, publicly traded entity and merged with Total Specific Solutions (TSS), a key player in the European VMS sector.

We initiated our position in Topicus shortly after its spin-off in March 2021. Since then, our Internal Rate of Return (IRR) on this investment has been 16%—a satisfactory rate, though below the company’s impressive fundamental performance over the same period (see table below). Revenues and operating income have grown at a robust 21% annual rate, while operating cash flow per share has increased by 18% annually.

The primary reason for the gap between our IRR and Topicus’s fundamentals is a modest compression in valuation multiples. This decline reflects tempered growth expectations as the pace of acquisitions has recently slowed. This slowdown suggests to us that management is being disciplined in the current environment and finding fewer attractive acquisition opportunities.

We have confidence in the management team’s judgment and expect them to maintain their disciplined acquisition strategy. Looking ahead, we anticipate growth to reaccelerate over the next several years as the company continues to identify and execute on high-quality opportunities in the European VMS sector.

As always, it’s a privilege to manage your capital, and we sincerely appreciate the trust and confidence you‘ve placed in us. We look forward to updating you again at the end of the first quarter, and we are always around if you would like to chat.

Best regards,

Alex and Joe

DISCLOSURES

The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot ensure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees.

Spotify has been a particularly compelling case study in this regard—one that offers valuable lessons not only about the company itself but also about the challenges and nuances of long-term investing. 

In our 2022 year-end investment letter, we posed a critical question: “Spotify (SPOT) is currently selling for about $15 billion. Does this make any sense?” Fast forward to today, Spotify’s stock has appreciated more than six-fold since that time, valued today at $95 billion.

Our journey with Spotify has been both interesting and instructive—an excellent case study for all investors. We first invested in Spotify in 2018, shortly after its IPO. At that time, the stock debuted at $132 per share. Today, it trades at $463 per share, delivering an annualized return of 21% over 6.5 years for those who invested right after the IPO. While this may sound like an unequivocal success, the story reveals some crucial lessons about investing.

If you had held the stock from its IPO until the end of 2023—a span of 4.5 years—you would have seen little to no return on your investment. All the gains for a long-term investor materialized in the last 10-12 months (refer to the chart below). This illustrates a key truth about investing: returns often come in unpredictable bursts, and timing the market is next to impossible.

As we have written about many times, the stock market rewards patience, but it doesn’t always deliver those rewards on your schedule. Investing is hard, but those willing to endure the periods of uncertainty and stagnation are often handsomely rewarded in the long run—assuming, of course, that you’re right about the wonderful business. 

Throughout our holding period, we often wrestled with doubts about whether Spotify, which initially appeared to fit all our investment criteria, still deserved a place in our portfolio. At various points, we questioned whether Spotify was merely a great product that people love—without being the great business with strong economics that we typically seek.

As investors, it’s essential to distinguish between a popular product and a business capable of generating durable, high-quality earnings. While Spotify undeniably captured the hearts of millions with its innovation and user experience, we sometimes wondered whether it could overcome the structural challenges of its industry, particularly its reliance on music labels and its thin margins.

The Peak of Our Concerns (Q2 2023)

Revisiting our notes from Q2 2023, it’s clear that our confidence in Spotify as an investment was beginning to waver. At the time, we were grappling with serious concerns about the company’s business model, which was not evolving in the way we had hoped. While Spotify had achieved remarkable growth—expanding its Monthly Active Users (MAUs) from 207 million in 2018 to over 500 million by mid-2023—we struggled to understand how this scale could translate into meaningful profitability.

Despite doubling its premium subscribers and driving strong user engagement, Spotify’s gross margins remained stuck at 25%, and its free cash flow had fallen sharply—from $209 million in 2018 to just $21 million in 2022. In contrast, the music labels, which owe much of their success to Spotify’s platform but still command significant power in the industry, have thrived. For example, Universal Music Group (UMG) saw its revenues grow from $6.9 billion in 2018 to $11 billion in 2022, with free cash flow more than doubling from $857 million to $1.9 billion. While Spotify’s growth has been impressive, much of the value it created has flowed to the music labels, leaving Spotify struggling to turn its scale into sustainable profitability.

One key insight from a Universal Music Group: The Gatekeepers of Music podcast highlights the inherent bargaining power dynamics between music labels and streaming platforms. The way we consume music differs fundamentally from how we consume video. With music, we often listen to the same songs repeatedly, whereas with video, once we’ve watched a season or a movie, we’re unlikely to revisit it—or may watch it only once more. This difference gives platforms like Netflix the ability to use their scale to develop new intellectual property (IP) that keeps users engaged in their ecosystem. In music, however, the old catalog is just as important as new releases. Roughly 37% of Spotify’s playlists are weighted toward new music, while 39% are weighted toward catalog content. This reliance on older music gives significant power to the IP owners—the major labels. If the music industry operated like the video industry, Spotify could bypass the labels by heavily investing in new music and signing emerging artists, much like Netflix does with original content. However, music consumers overwhelmingly demand access to both the latest hits and the old catalog. Without that catalog—owned primarily by three major labels—streaming platforms have no product.

As a result, we became increasingly concerned that Spotify’s original structural challenges were unlikely to change. Universal Music Group (UMG), Warner, and Sony collectively control the vast majority of the music catalog, and they extract 70–75 cents of every dollar Spotify generates. This dynamic effectively caps Spotify’s margin potential, no matter how much it grows.

Moreover, we questioned Spotify’s push into podcasting and audiobooks. While these verticals offer the promise of higher margins, Spotify appeared to lack a clear path to differentiate itself from competitors like Apple, YouTube, and Amazon. Without strong differentiation, these initiatives risked becoming commoditized, adding further pressure to Spotify’s already thin margins.

This led us to a critical question: If Spotify cannot achieve profitability with 500+ million users, how will additional scale change this dynamic? At the time, we were starting to believe that it wouldn’t. Spotify seemed stuck in a commoditized space, generating enormous value for the music labels but struggling to capture sufficient value for itself.

Our Thoughts Today

In 2024, Spotify has finally started showing signs that it could potentially become not just a great product but a great business as well. Throughout our holding period, we have always viewed Daniel Ek as an exceptional founder and CEO—someone capable of navigating Spotify through the complexities of the music streaming industry. But does the stratospheric 150% rise in SPOT’s stock price this year influence our renewed optimism? We don’t think so.

As long-term investors, we strive to follow Warren Buffett’s timeless advice to treat Mr. Market as a tool to serve us, not a guide for our decisions. Stock price movements alone should never dictate our assessment of a business. With that in mind, we to set aside the recent rally and focus solely on the business fundamentals. The key question is: What has changed?

To begin, lets first acknowledge that Spotify’s ability to grow its user base and premium subscribers has been nothing short of remarkable. By the end of 2024, Monthly Active Users (MAUs) are projected to reach 665 million, while Premium subscribers are estimated to grow to 260 million (please see chart below). These figures represent continued momentum in expanding its global footprint and reinforcing its position as the leading audio platform.

Revenue Growth Re-Acceleration

One of the most notable developments in 2024 has been Spotify’s ability to meaningfully re-accelerate its revenue growth. After a period of deceleration—where quarterly revenue growth slowed to nearly 10% in Q2 and Q3 of 2023—the company has rebounded strongly, posting growth in the high teens. This resurgence has been driven largely by successful price increases across key markets, demonstrating Spotify’s newfound pricing power.

This shift has not gone unnoticed by Mr. Market, as investors have welcomed the company’s ability to grow both its top line and its margins simultaneously. Price increases have historically been a delicate balancing act for Spotify, given concerns about user churn. The fact that these adjustments have been met with minimal resistance is a positive signal that Spotify’s value proposition remains strong, even at higher price points.

Gross Margins: A Key Turning Point

Gross margins have always been our primary focal point when assessing Spotify’s business model. For years, we were concerned that gross margins were stuck at around 25%, which meant that Spotify was paying 75 cents of every dollar to music labels. This left little room for profitability or reinvestment, despite the company’s impressive growth in user base and the continually improving quality of its platform. However, in 2024, Spotify has finally started to demonstrate that it is possible to meaningfully improve its economics.

The company is estimated to achieve ~32% gross margins in Q4 2024, signaling significant progress. Several factors have driven this improvement. Spotify’s marketplace program, which helps artists and labels promote their content, has developed well and contributed positively to gross margins. Additionally, efficiencies in streaming delivery costs, payment processing, and favorable U.S. publishing rates have provided further tailwinds. These factors contributed to the margin gains seen in both Q2 and Q3 of this year.

The improvement in Premium gross margins is even more impressive, with the latest quarter posting 33.5%. This demonstrates that it is indeed possible for Spotify to improve its economics in its core subscription business. Moreover, Spotify has addressed past missteps in the podcasting space. Initially, the company spent heavily on proprietary podcast content, attempting to replicate Netflix’s strategy of exclusive originals. This approach failed to deliver the desired results and weighed heavily on Spotify’s Free Gross Margins, particularly between Q1 2022 and Q1 2023 (see the graph below).

However, Spotify has learned from those early mistakes, pivoting away from that strategy and focusing instead on scaling its advertising segment and improving the profitability of podcasts. These adjustments have led to margin improvements and positioned the company to capitalize on significant opportunities in advertising (a topic we’ll explore later in this write-up). If successful, we believe that Spotify’s gross margins could eventually reach 40%, a level that would fundamentally reshape the company’s business model and valuation potential.

Source: Rowan Street Capital LLC, Spotify quarterly filings

Gross margins are one of the Key Performance Indicators (KPI) upon which future valuations will be built, and this progress forms the foundation of our renewed optimism in the long-term prospects of the company.

Daniel Ek on from Q3 ‘24 earnings call: 

“In terms of our recent gross margin improvement, we are very pleased with the strides we made this year. The significant rate of improvement in our gross margin in 2024, which exceeded even our own plans has been exceptional and should be viewed as such. Looking ahead, we see a substantial runway to grow margins and income over the long run, which will be driven by continuing focus on improving our product and business via targeted investments, disciplined management and improving monetization.”

Operating Expense Discipline 

Coinciding with improvements in gross margins, Spotify has also demonstrated impressive cost discipline with its operating expenses. From the chart below, it’s evident how R&D and SG&A expenses have come down as a percentage of revenues since mid-2023. This discipline, combined with gross margin improvements, has significantly improved Spotify’s overall profitability.

To put it all together, these advancements have directly flowed through to operating margins, which recently reached 13.1% (see below). For a company that has been unprofitable since its inception, this marks a transformative shift. As the chart below illustrates, Spotify has not only moved out of the red but is now showing operating leverage that we once struggled to envision.

Previously, we questioned whether Spotify could ever achieve even a 10% operating margin, but the company’s recent performance has forced us to reevaluate. Given its current trajectory, there is a realistic path for Spotify to achieve operating margins of 20% in the future. This is a fundamental realization for us, as it changes the narrative around Spotify’s long-term potential from a purely growth-focused platform to a potentially highly profitable business.

This combination of disciplined cost management, gross margin expansion, and improving operating margins forms the cornerstone of our renewed optimism in Spotify’s ability to generate significant shareholder value over time.

Free Cash Flow: A Critical Milestone 

Consistent with the improvement in operating profits, Spotify has experienced a significant boost in its free cash flow generation. Over the past 12 months, the company has produced €1.8 billion in free cash flow—a dramatic increase compared to the €200-250 million range where it had been stuck since 2018 (refer to chart below).

Source: Spotify Q3 2024 shareholder deck

The Exciting Role of Advertising in Spotify’s Future

As investors in both Spotify (SPOT) and The Trade Desk (TTD), we found recent comments from The Trade Desk CEO Jeff Green particularly illuminating regarding Spotify’s advertising potential.

”Digital audio is at the early stages of its evolution. The channel is in a similar position to where Connected TV (CTV) was a few years ago. Consumers in the U.S. spend an average of three hours per day consuming digital audio, up significantly over the last five years, and advertisers are eager to capitalize on this emerging advertising channel. At the moment, advertisers are looking for clear trusted signals to inform what they buy. Trust but verify, has become a mantra around the open Internet. Just a few weeks ago, media reported on our major expanded partnership with Spotify. They will be deploying both UID2 and OpenPath, so that advertisers can find as much addressability and insight as possible for Spotify's high-value ad impressions. I don't think there's a company in the media universe that's been more successful than Spotify at building a subscription model. In the audio world, Spotify gives us access to almost all of the world's music for a low monthly subscription. In many ways, Spotify has been at the forefront of this mass consumer shift to digital audio. I think they are in the process of becoming well positioned to get incremental users due to a good ad experience and to get incremental ad budgets for the exact same reason. You only have to listen to their most recent earnings report to understand how seriously they are taking the ad-supported side of their business and building out their programmatic capabilities over the next several years. We are very excited to partner with them in this work and to help our advertiser clients make the most of this fast-growing channel, where listeners are highly engaged and leaned in. Our partnership with Spotify is one of the inventory partnerships that I'm most optimistic about.”

Here what Daniek Ek said on the earnings call in regards to Spotify’s Ad Exchange and working with The Trade Desk:

”Our ad business today has been heavily reliant on direct sales and top funnel brand spend. And therefore, what we've seen over the years is that the type of ads business that we built has an exposure to macro trends. So with this, we have now diversified and changed our platform and built this Spotify ad exchange, and moved on with the Trade Desk as a test pilot. What we do see is that 2025 will be a year of testing and trying out this and we will see the impact going into 2026. It is early days. We are new to the auction environment and it's important that we are very deliberate and careful about how we roll out the supply into these channels, but we are also at the same time, very excited that this will help us to change.“

This initiative aligns perfectly with Spotify’s broader strategy to expand its advertising segment, which we believe could be a game-changer for its financial profile. With the growing importance of digital audio, highly engaged users, and advancements in programmatic ad technologies, Spotify is positioning itself as a key player in what could become one of the fastest-growing advertising channels in the years ahead.

Valuations and Future Growth Prospects

All the improvements we’ve discussed in this write-up have not gone unnoticed by Mr. Market. Since hitting its lows in 2022, Spotify’s stock surged by +138% in 2023 and is up another +150% so far in 2024. This dramatic recovery reflects a significant shift in investor sentiment—from maximum pessimism to heightened optimism in less than two years.

When we published our write-up at the end of 2023, SPOT was trading at approximately 6x Gross Profits—a valuation that reflected widespread skepticism about the company’s ability to improve its economics. Today, the stock is trading at 21x trailing Gross Profits, representing a 3.5x jump in valuation multiple. This sharp re-rating underscores the market’s renewed confidence in Spotify’s ability to deliver sustainable profitability and long-term growth.

Looking ahead, revenues for 2024 are estimated to be €15.6 billion, and we believe they could grow to €26+ billion by 2027. This assumes Spotify can grow its Premium subscriber base to 360+ million and increase ARPU from the current €4.62 to over €5.00—both of which we see as achievable. Additionally, we anticipate that the ad-supported business, fueled by Spotify’s ad-tech efforts, could start growing at a much faster pace, potentially doubling from the current €1.9 billion to €3.6 billion by 2027 (obviously this is still a big IF and depends on the success of Spotify’s ad-exchange platform and partnership with TTD). 

We are also optimistic about Spotify’s gross margin expansion, which could reach 35% by 2027, driven by continued improvements in Premium margins and Free Gross Margins profitability. Under this scenario, gross profits could exceed €9 billion by 2027—a 26% annual growth rate from €4.6 billion in 2024. If Spotify manages to maintain lean operating expenses as demonstrated in 2024, operating margins could rise to 15% by 2027, resulting in €4 billion in operating profits—a remarkable 43% compound annual growth rate from €1.4 billion in 2024.

Hinging on these assumptions, valuations could top $120 billion by 2027, which from current valuations would deliver 10–12% annualized returns (IRR) for us over the next couple of years. While this is a decent return, it’s a stark difference from the 45% annualized returns (IRR) we were forecasting in our January 2023 note. This highlights how much of the future growth and profitability is already priced into the stock after its substantial re-rating over the past two years.

Our Position Sizing and What We Do From Here

“The best investments require a lot of focus, time, and energy. It’s about finding a few great businesses and holding onto them.” — Bill Ackman

At Rowan Street, we run a concentrated strategy. We’ve always believed in owning our 10-12 best ideas rather than spreading our time and capital across 25 or even 100 positions, as is common in the industry. Great investment opportunities are rare, and the ability to focus capital on them is one of the most valuable aspects of our strategy. However, this approach comes with trade-offs: it leads to bumpier returns and often draws more attention to mistakes when things don’t go as planned. This is the price we willingly pay for the potential of achieving above-average returns over the long term.

How Our Approach Has Evolved

Since we started Rowan Street in 2015, our approach to portfolio management has evolved. After initiating our position in Spotify in 2018, it gradually became our largest holding over the following years. This was driven by our confidence in the company’s management, long-term potential, and attractive valuations—especially compared to other ideas that appeared “pricey” at the time.

Looking back at our 2020 notes, we were enthusiastic about Spotify’s future. The stock was trading at an undemanding 4x forward 2021 revenues, and we saw an immense opportunity to generate value for our investors. Spotify has been led by Daniel Ek, who is widely regarded as one of the most innovative and forward-thinking entrepreneurs in the digital media space. Under his leadership, the company has addressed a multi-billion-user opportunity and positioned itself to lead the nascent podcasting industry. We believed it could eventually disrupt music labels, empower independent musicians, and improve gross margins over time.

With this conviction, Spotify’s weighting in our portfolio grew to over 20%. However, in hindsight, this was a “forced bet,” driven by our optimism about the business rather than the natural evolution of the portfolio.

Lessons Learned and Guiding Principles

The drawdown of 2022 forced us to reassess our approach to portfolio management. It was a valuable learning experience that led us to adopt an important new guiding principle:

Let the portfolio concentrate itself in winners naturally, rather than forcing a position. Positions that go up and become larger pieces of the portfolio have earned that right. Those that go down and become less significant have earned their fate. The reality is that our portfolio gravitates toward winners if we simply let it. It’s easier to sleep at night when your largest position got that way by going up, rather than being an under-performer you keep adding to, trying to prove the market wrong.

This principle allows us to reward companies that demonstrate sustained success while avoiding the “emotional trap” of doubling down on under-performers.

Position Adjustment: A Shift in Approach

By Q4 2023, despite Spotify’s stock price running up to $240, our confidence in the business model was waning. Our analysis suggested that operating margins were unlikely to exceed 8% over the next 3-4 years—well below what we expect from an exceptional business. While we respected Daniel Ek’s leadership and admired Spotify’s accomplishments, we remained concerned about its lack of a strong moat and the poor returns on reinvested capital.

At over 20% of our portfolio, Spotify’s weighting felt disproportionate to its business quality. We made the decision to trim Spotify back to a core 10% weighting, consistent with our portfolio structure. In hindsight, while it may have been much more lucrative to hold all our shares as the stock ended up doubling since then (investing is hard), this decision was guided by our new principle of letting positions earn their way to higher weightings.

Where We Stand Today

Fast forward to today, Spotify now represents 15% of our portfolio—not because we forced it, but because it has earned that position through appreciation. By sticking to our principle, we avoided emotional over-investment and allowed the portfolio to naturally concentrate in a winner.

This evolution highlights the importance of staying flexible and learning from experience. Our decision to trim Spotify was about sticking to a disciplined approach of aligning our portfolio with businesses that consistently demonstrate extraordinary performance and the ability to compound value over time. Spotify remains a company we respect, and its current weighting reflects our ongoing commitment to letting winners prove themselves.

DISCLOSURES

The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot ensure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees.

Rowan Street had a strong third quarter, posting a +12.8% net return. Year-to-date, our fund is up +42.3% (net), outperforming the S&P 500’s +22% return. Over the trailing 12 months, Rowan Street posted a gain of +72% (net), compared to the S&P 500’s +36.3%. This performance reflects the strength and resilience of our portfolio companies, with most delivering one of their best quarters since the inception of our fund. In our last letter, we provided an in-depth review of our top five holdings, so we won’t be going into much detail on them in this update.

We are also very happy to see the fund back in double-digit territory on an annualized basis since inception (gross), and we are working hard to get it back into double digits on a net basis, which has been our long-term goal since day one.

The 20 Punchcard Philosophy

In the following video, Warren Buffett describes a very fundamental concept from the book “The Science of Hitting“ by Ted Williams. Williams, regarded as one of the greatest hitters in baseball history, emphasized that success lies in waiting for the perfect pitch — one that sits squarely in your sweet spot. 

According to Buffett: “Investing is an enormously advantageous game because unlike the baseball analogy, there are no called strikes. We can have thousands of ideas thrown at us and we don't have to swing at them and no one will call a strike. Only when we see something that we understand and it's within our sweet spot and we like the price at which it's selling, only then we swing. It's a terrible mistake to think you have to have an opinion on everything. You only have to have an opinion on a few things.” Buffett told students that if when they got out of business school they got a punchcard with only 20 punches on it and that's all the investment decisions they get to make in their entire life, they would get very rich because they would think very hard about each one. “And you don't need 20 right decisions to get very rich. 4 or 5 would probably do it over time.”

The 20-punchcard approach is very widely known, and we’ve been familiar with it for a long time. I first encountered it in my early 20s while extensively studying Buffett, and it immediately resonated with me due to its simplicity. However, implementing it in practice is far more challenging than it seems. Today, it’s even harder to follow, as many investors now operate with much shorter time horizons. With information and ideas constantly flooding in from every direction, attention spans have shrunk, and true patience and focus are increasingly rare. It’s one thing to understand the concept intellectually, but another to fully internalize it and live by it. After many years of managing money and over nine years running Rowan Street, I can honestly say that I’ve only truly embraced and internalized this wisdom in the past few years.

To put it in perspective, in our first two years of operation (2015-2016), we made 22 buy decisions and 8 sells. We were still finding our footing, working with limited capital and trying to discover our sweet spot in the market. If we had been using a 20-punchcard back then, we would have punched through it in the first two years! But experience is the best teacher. Over the last two years (2023-2024), we’ve made only 2 buy decisions. Some might look at this reduced activity and wonder if it reflects a lack of progress. We believe it's actually quite the opposite. This shift signals that we are beginning to truly live and breathe the 20-punchcard philosophy.

The truth is, it takes years—sometimes decades—of investing to discover your ‘sweet spot’. Developing the judgment to recognize the right pitches takes just as long. Often, it’s through years of ownership that you gain a deep understanding of a business, as the most valuable insights don’t always reveal themselves right away. This is how instincts are honed—slowly, through experience, with unwavering focus and patience.

One of our guiding principles aligns perfectly with this philosophy: 

Comfortable Doing Nothing:

The hardest part in our business is holding on to your positions and doing nothing. We believe that activity is the enemy of returns, and we are quite comfortable doing nothing until there is something truly worthwhile to do.  We spend our time doing a lot of reading and thinking and NOT a lot of acting. In that we are sort of the polar opposites to a lot of investors. Many investors do a lot of acting, and not a lot of thinking. “All of humanity’s problems stem from man’s inability to sit quietly in a room alone” – Blaise Pascal.  

At present, our portfolio consists of 8 core positions, along with a few smaller, ‘emerging’ ones we’re studying closely. If we stick to the 20-punchcard philosophy from here on out, we’ve only got 12 more decisions to make. That means, if we plan to run this fund for another 20 to 25 years, we only get to make one decision every two years, on average. This kind of selectiveness forces us to think very deeply before letting any new position into our portfolio. It sounds simple, but in practice, it demands an extraordinary level of discipline.

In our experience, this approach—fewer, but higher quality decisions that fit right in our sweet spot, held over long periods—is the most effective way to build lasting wealth and fully harness the power of compounding. Success in investing isn’t about how many swings you take; it’s about making sure the swings you do take truly count over time.

As always, it’s a privilege to manage your capital, and we sincerely appreciate the trust and confidence you‘ve placed in us. We look forward to updating you again at the end of the year, and we are always around if you would like to chat.

Best regards,

Alex and Joe

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DISCLOSURES

The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot ensure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees.

We are pleased to report that Rowan Street posted a gain of +26.2% (net of fees) during the first half of 2024, outperforming the S&P 500 Index, which advanced +15.3% over the same period. Over the last 12 months, ending June 30, our fund has delivered a return of +43.2% (net), well ahead of the S&P 500’s +24.6%. 

Since 2022, our portfolio has rebounded by 155.7% (net). However, we still have ground to cover before reaching the high-water mark set in June 2021. As a reminder, the high-water mark ensures we only earn performance fees on gains that exceed the highest previous value of your investment, protecting you from paying fees on recoveries after a decline. Consistent with this principle, we have not collected any fees from investors who experienced the drawdowns in 2021-22, as we do not charge fixed management fees. From day one, our fundamental belief has been that we should only be compensated when we make our investors money. This approach, which we consider the fairest, ensures our interests are perfectly aligned with yours.

Our objective remains to restore our inception returns to double-digit levels — a goal we’ve been committed to since day one. We invite you to continue reading, as we’ll outline our strategy for achieving this in the remainder of this letter.

All of our portfolio companies have now reported their earnings for Q2’24, and we are happy to report that this was an exceptionally strong earnings season across the board. As of the end of August, our fund stands at +33.1% (net) year-to-date.

The primary drivers of this performance in 2024 include contributions from key holdings such as Spotify (+82%), Meta (+48%), Trade Desk (+45%), and Topicus (+47%). However, Shopify was a drag on our performance, with its stock declining by (-15%) through the end of June. The stock has since rebounded strongly on the back of a robust earnings report and is now only down (-5%) year-to-date (please refer to the table below).

As you’ll see from the historical returns of our core holdings, stock prices can exhibit volatility in any given year, often dictated by Mr. Market’s unpredictable temperament. These mood swings have been particularly pronounced in the last three years. But remember, the underlying fundamentals of businesses seldom fluctuate to the same degree. Over the long term, stock prices will eventually reflect the true value of the businesses they represent.

In our original letter back in 2015, we laid out a simple vision:

Today, we can say we’ve stayed true to that vision. We believe that our portfolio is composed of some truly exceptional businesses, and in our opinion, each managed by some of the best owner-operators in their industries. The way we look at it is building a portfolio is akin to creating a work of art. It’s taken nine years of dedication, filled with successes and, yes, our fair share of mistakes. But each misstep has been a steppingstone, paving the way to where we are today. Though investing is never without its ups and downs, we are very pleased with the portfolio of companies we have in place.

As we look forward to the next 5-10 years, we are filled with optimism. We believe that our portfolio is strategically positioned to seize the opportunities ahead. While the road won’t always be smooth, the strength and resilience of our businesses give us confidence that we’ll continue to create long-term value for our partners.

On average, our portfolio companies, based on current analyst estimates, are projected to grow revenues by 15% per year over the next three years, outpacing the 4-6% revenue growth expected for the S&P 500. More importantly, earnings for our companies are estimated to grow at an impressive 32% annually over the same period, driven by enhanced projected profitability from key holdings like Spotify, Trade Desk, Shopify, and Netflix. Even if the market chooses to lower the multiples on these businesses in the future, there is a good probability that strong revenue and earnings growth should still allow us to deliver solid returns.

Our long-term approach remains unchanged: to continue being long-term owners of what we believe are the most outstanding businesses we can find, to avoid overpaying for them, and to allow them to flourish and compound value for us over time. While the last part sounds very simple, in practice, it's the most challenging. To succeed in investing, you have to do something others aren’t able or willing to do. In today’s fast paced world, investors find it very difficult to be focused and patient. Therefore, our focus, patience, and unwavering conviction in a few select holdings — which we work very hard to uphold — may well be our greatest edge. 

PORTFOLIO UPDATE

In this section of the letter, we would like to provide you with an update on the business progress of our top 5 largest holdings: Meta, Spotify, Trade Desk, Topicus and Shopify. As always, our focus remains on the long-term value creation of these companies, and not on any particular quarterly results.  

Meta Platforms (META)

We are pleased to report that Meta Platforms, our largest position in the fund, has delivered a remarkable performance, +450% since our November 2022 note. Our investment in Meta dates back to 2018, with an average cost basis of approximately $172 per share. Today, the stock trades around $535, reflecting a 3x return over the six-year holding period, equating to a 20% annualized return.

We would like to remind you that achieving these types of returns is never a straight path. From time to time, we might experience volatility — that’s simply part of the investment journey. In fact, wealth creation and volatility go hand in hand. There’s no escaping it; it’s the "price of admission" the market demands. If you take a look at the chart below, you’ll notice the drawdowns META stock has faced over the years, with 2022 standing out as a particularly challenging period, where the stock saw a 75% drop.

Source: finchat.io

However, if we were to tune out the market’s volatility (and the emotions that inevitably come with it) and focus solely on the fundamentals of the business with a long-term perspective, the results are quite impressive (see key performance data below). Over the course of our six-year ownership, the growth in revenue, earnings, and free cash flow per share closely mirrored the strong returns we achieved from the stock.

Source: SEC Filings, Rowan Street Capital LLC

Q2‘24 results update (source: company quarterly filings):

We were pleased with Meta’s robust progress in its financial and strategic position.  There are now 3.27 billion people that use at least one of their apps each day. In Q2, Meta achieved a 22% year-over-year increase in revenue, reaching $39.07 billion, and net income rose by 73% to $13.47 billion, surpassing analyst expectations. Key to this growth is their significant investment in artificial intelligence, particularly with the development of their Llama 3.1 model. CEO Mark Zuckerberg envisions Meta AI as potentially the most used AI assistant globally by year-end, although monetization will take time. AI integration has also bolstered their advertising revenue, which grew to $38.33 billion, demonstrating its effectiveness in optimizing their core business. Their “Family of Apps” core business posted a $19.3 billion operating profit in the quarter, which resulted in a very impressive 50% operating margin — we don’t often come across businesses that put up those kind of margins. The company has also increased its capital expenditure forecast to $37-40 billion, underscoring its commitment to AI infrastructure. We believe that Meta's strategic focus on AI and open-source initiatives positions it well for future success.

Spotify (SPOT)

Back in our 2022 year-end letter, we highlighted Spotify, which was trading at roughly $15 billion at the time. We asked the question: “Does this valuation make any sense?” Now, just 18 months later, Spotify is valued at about $68 billion — a 4.3x increase. To put this in perspective, we initially estimated a valuation of about $70 billion by 2025, and it seems we got there a bit faster than anticipated.

Spotify went public in 2018 at a price of $132 per share. We began purchasing shares that same year and continued to add to our position as the stock appreciated. Today, Spotify trades at $337 per share, reflecting a total return of 155% since its IPO, or about 16% annually — quite a respectable performance. However, our average cost basis is $216, as we increased our position as the stock rose. As a result, the stock return from that cost basis stands at 58%. While it's somewhat disappointing in comparison to the overall gain since the IPO, we remain confident in the position we’ve built, given the company’s strong long-term growth and profitability potential.

Spotify’s rise in stock price has been far from a smooth journey. Take a moment to consider the drawdowns since its IPO. Much like Meta, Spotify faced an 80% decline in 2022 — an experience not suited for the faint of heart. We stayed with it… 

Source: finchat.io

…and focused on the actual fundamentals of the business, where Spotify performed quite well over time. Active users and premium subscribers have grown at an impressive pace, while both revenues and gross profits have increased at an annual rate of over 20%.

Source: SEC Filings, Rowan Street Capital LLC

Although the free cash flows have been relatively flat until 2023, the company has recently become a strong cash generator as you can see from the chart below.

Q2 results update (source: company quarterly filings):

Spotify achieved record profitability, reporting a net income of €274 million and a 20% year-over-year revenue increase to €3.8 billion. Gross margins improved to 29.2% — an all-time high — underscoring the company’s efforts to boost efficiency.  Premium subscribers grew 12%, reaching 246 million, while monthly active users rose by 14% to 626 million. The company’s operating income surged to €266 million from a loss of €247 million in Q2 2023, reflecting Spotify's recent focus on cost efficiency and monetization strategies, including a streamlined podcast strategy and enhanced ad revenue initiatives.

The Trade Desk (TTD)

We have owned TTD for a little over 4 years now, opportunistically establishing a position in March of 2020 at a cost basis of $17.40 (split-adjusted).  Since then, TTD has appreciated nearly sixfold, delivering an annualized return of approximately 55%. These are indeed remarkable results, but it’s important to recognize that this journey has been far from a smooth ride—much like many of our other investments. Since its public debut in 2017, the stock has experienced several significant drawdowns, with the most notable occurring in 2022 when it declined by over 60% (see below).

Source: finchat.io

As we have previously discussed in relation to our investments in Meta and Spotify, one would have to be comfortable with sitting through these dramatic drawdowns and keeping their emotions in check in order to realize the long-term rewards of compounding that this company had delivered. 

Turning attention to the fundamentals of the business rather than gyrations of stock prices, the progress is very impressive as evidenced from the numbers below.  Over the 4 years, revenues, operating earnings, and earnings per share have each grown at a rate of 30%+ annually. Our return from holding the stock has been even greater than that since we were able to opportunistically purchase the stock when it briefly traded at 10x revenues during the early days of the pandemic scare. The multiple has now recovered to 20x revenues, which boosted our returns. 

Source: SEC Filings, Rowan Street Capital LLC

Q2 results update (source: company quarterly filings):

In The Trade Desk's latest quarter, the company reported a revenue of $584.6 million, marking a 26% year-over-year increase, which exceeded analyst expectations. Adjusted EBITDA came in at $229 million with an impressive 39% margin. 

CEO Jeff Green emphasized the company's strong position in the digital advertising ecosystem, particularly in Connected TV (CTV) and retail media. He highlighted that their success is driven by the shift towards data-driven advertising and the growing adoption of their Unified ID 2.0 solution, which is seeing broad industry support.

Topicus (TOI.V)

As a reminder, Topicus is a Dutch company that acquires, manages and builds vertical market software (“VMS”) businesses, primarily located in Europe. Generally, these businesses provide mission critical software solutions that address the specific needs of their customers in particular vertical markets. 

Topicus was spun off from Constellation Software, a Canadian company, in February 2021. Constellation Software established Topicus.com Inc. as an independent publicly traded entity and merged it with its subsidiary, Total Specific Solutions (TSS), a key player in the European VMS sector. We took a position in Topicus shortly after its spin-off, with an average cost basis of CA$70.19. Currently, the stock is trading at CA$124, reflecting a 19% annualized return over approximately 3.5 years holding period.

Our investment returns have closely mirrored the growth rate of revenues, operating income and operating cash flow per share (see below):

Source: SEC Filings, Rowan Street Capital LLC

If you take a look at the graph below, which shows the trailing 12 months data, you’ll notice that Topicus has seen a significant increase in cash flow generation in 2024 — doubling from the levels that we observed back in 2021. This is a result that we’re certainly pleased with. However, the pace of acquisitions has noticeably slowed. This indicates that management is finding fewer attractive opportunities in the current market. We have confidence in their judgment and expect them to continue being disciplined in their acquisition strategy.

Shopify (SHOP)

Shopify has been an incredibly rewarding investment for those lucky enough to get in early after the company's initial public offering (IPO) in 2015. The shares have delivered a return of 2,600% or 42% annual. Its revenues have grown at 49% per annum since the end of 2014 from $105 million to estimated $8.6 billion in 2024. The massive e-commerce market is a huge opportunity, as the company's growth indicates. As you tell from the chart below, revenues are forecasted to grow above 20% for the next 3 years. Keep in mind, Shopify has been around for more than a decade — and it's still growing at these high rates.

We have owned Shopify for only 2.5 years, establishing our position in the first quarter of 2022 at a cost basis of $60, after the stock collapsed from its highs of $169 in November 2021. In hindsight, our entry may have been a bit premature, as the stock continued to plunge, eventually reaching a low of $27 in October 2022. However, such market movements are inherently unpredictable, and we seized the opportunity to invest in a company we had long admired. 

As you can see in the chart below, the drawdowns for SHOP over the past five years have been dramatic, with the stock dropping over 80% in 2022:

Fast forward to today, the stock trades at $75 — a 25% return for our holding period or 9.5% annual, which is a bit disappointing so far.  However, our holding period for the stock is still relatively short and we are optimistic about the long-term growth prospects of the company.  If we turn to the fundamentals of the business, Shopify had put up some very impressive growth numbers in the past 2.5 years that we had owned it (see table below):

Source: SEC Filings, Rowan Street Capital LLC

Q2 2023 update (source: company quarterly filings):

Shopify's stock surged close to 25% following a strong second-quarter earnings report that exceeded expectations on both revenue and profit. Revenue increased by 21% to $2.05 billion, surpassing the forecast of $2.01 billion, and gross merchandise volume rose 22% to $67.2 billion. The company also reported a significant rise in free cash flow and improved gross margins, aided by higher subscription prices and the sale of its logistics business. Additionally, Shopify provided optimistic guidance for future revenue growth and margin expansion, further boosting investor confidence, leading to the sharp rise in the stock price.

As always, it’s a privilege to manage your capital, and we deeply appreciate the trust and confidence you place in us. We hope you have enjoyed your summer and we are always around if you would like to chat.

Best regards,

Alex and Joe

DISCLOSURES

The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our Fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot assure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee The top 5 will continue to perform and, more generally, there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees.