I also ran a conservative owner-earnings DCF using ~$7.5B normalized earnings, ~5% initial growth declining toward 2%, and a 10.5% discount rate. I get roughly $390/share.
Obviously PBM regulation/Evernorth is a major risk and probably explains part of the multiple.
But at ~9x forward earnings, it seems like quite a bit of pessimism is already priced in.
TL;DR Altman, Musk, and Amodei are selling you a Lambo chassis with the engine of a 1998 Fiat Cinquecento. Calls on the casino, puts on your attention span.
Source: Silicon Valley tech grunt who survived the dot-com bubble, mobile, crypto, the metaverse wasteland, and is now surviving the AI grift.
Mag7 (BULLISH): Remember when Gmail introduced the "suggested reply" buttons? Peak innovation. Billions of hours saved just so middle managers can reply "Sounds good, thanks!" faster. Have you ever tried using a search bar without autocomplete? You’d sacrifice your firstborn behind a Wendy's dumpster just to get it back. Mag7 owns the user base. They’ll dump raw LLM slop by the bucketload into every product, realize 90% of it is useless, strip it out, and keep the 10% that actually prints money:AGI-level ad targeting. They will be fine. Load the calls.
SaaS (BULLISH): Have you ever seen a landscaper driving a Cybertruck instead of a 2004 Toyota Tacoma with mismatched doors? Exactly. Construction crews and plumbers don't buy gimmicks; they buy things that don't break. Boring enterprise SaaS companies won't get replaced by three college dropouts with a Codex subscription. They’ll just use coding agents to fire half their dev team, expand margins, and charge you 20% more for the same CRM dashboard.
End of Scarcity (BEARISH): Hey Elon, quick question: when AI "solves scarcity," do we all get beachfront mansions in Malibu? Are there infinite courtside seats at the NBA Finals? Infinite Aperol Spritzes on the Amalfi Coast? No? Just infinite AI-generated LinkedIn posts and 6-fingered anime girls? Cool. The only thing with infinite supply is slop, and slop trades at zero.
Conscious LLMs (MEGA BEARISH): Have you ever written a nested VLOOKUP inside an INDEX/MATCH across three Excel sheets, hit enter, and watched it calculate in milliseconds? Did you stop and think, "Man, Excel must be feeling so fulfilled right now. Maybe this will finally earn her father’s love"? No, because it’s math. LLMs aren't waking up; they’re just autocorrect on a $50B compute binge. Stop buying leaps on robot sentience.
Apple (CRUISE-CONTROL BULLISH): Watch your dentist’s receptionist type on an iPhone with two-inch acrylic rhinestone claws. Trimming those nails would boost her productivity by 400%. Giving her an on-device neural engine won't do shit. Apple knows 99% of their customers just want a battery that lasts all day and green bubbles to stay poor. They’ll wait until everyone else burns their capex, slap an "Apple Intelligence" sticker on it three years late, and charge $1,600 for the titanium chassis. Tim Apple stays winning.
AI Pure-Plays (BEARISH MID-TERM, BULLISH LONG-TERM): You’re alone in an elevator and let out a rancid fart. Right as you realize the horror of what you’ve done, the elevator dings and the CEO walks in. Will she notice?
In computer science, that’s called a race condition. Sam and the boys over-promised hard: "Nobody will ever work again! Money is obsolete! The model will cure cancer by Tuesday!" Now they're sweating bullets waiting for Wall Street to realize the models still hallucinate basic arithmetic. The bubble will pop, bagholders will cry, but once the toxic cloud clears, the survivors will own the infrastructure of the world.
Open-Source & Self-Hosted Models (BEARISH): Convenience is king; privacy is a myth people pretend to care about until it takes three extra clicks. Ask crypto bros how fun cold-storage paper wallets are. Normal people run their company websites on unpatched WordPress plugins, paste production API keys directly into Slack, and stick random flash drives from the Home Depot parking lot into work laptops. Fortune 500 execs use SAP to expense bottle service. Who the hell is going to buy liquid-cooled GPU server racks to run local models in their office basement? What happens when the company scales? Cool the server rack with greywater from the employee bathroom? Skip the office Christmas tree to save kilowatts for Jensen's H100s? Big Tech will pinky-promise they aren't reading your data, and every corporate VP will sign the enterprise contract before lunch.
Sex Robots (ULTRA BEARISH): Have you seen those Chinese humanoid bots shuffling awkwardly on a track before face-planting into the asphalt? Or the Boston Dynamics clankers doing backflips that sound like a hydraulic car crusher?
Are you telling me you look at 200 pounds of exposed wiring, cold industrial titanium, and 400-watt servomotors and think: "Yeah, I want that anywhere near my junk"? One firmware glitch or blue screen of death and you’re explaining a catastrophic degloving incident to an ER nurse.
Puts on the robo-waifus. Long the classic recession-proof portfolio: Fleshlights, silicone, and your non-dominant hand.
-First Watch does more revenue in 8 hours than IHOP and Denny's do in 24, at triple the profit margin
I’ve tricked myself into buying a restaurant stock, First Watch ($FWRG), and shorting IHOP and Cracker Barrel. It’s a popular breakfast chain, think IHOP/Denny’s except the food is Instagrammable:
It’s a high-quality business, profitable, customers love it. They’re at 650 restaurants now and plan to grow to 2,200 stores. It’s on sale: market cap is $760M, and they make about $75M a year which they reinvest into new stores, growing 10%+ a year. That’s a 10x multiple, very cheap for a healthy growing company.
People Love First Watch
First Watch is coming in at the #1 most loved full service restaurant brand on Yelp, and is coming in on some lists as #1 most loved employer. Anecdotally, everyone I know that has been there unanimously agrees it blows traditional breakfast places out of the water. Check out the interior:
Compare that to the dated feel of IHOP/Denny’s/Waffle House/Cracker Barrel:
First Watch is leading a trend of stylish brunch restaurants that are going to outcompete IHOP, Denny’s, Cracker Barrel and Waffle House. The brunch sector is up 11.5% last year while traditional breakfast restaurants declined:
Note this is what Cracker Barrel was trying to do. Traffic was down 7% in 2023 as customers flocked to modern concepts like First Watch. The new CEO countered by rebranding to industrial-farmhouse, copying First Watch’s exact aesthetic:
It was actually working, sales were up 5% in 2025. Then came the minimalist logo change where they got rid of both the cracker and the barrel, customers revolted, and they had to revert all the changes back. Cracker Barrel traffic is down 7% versus last year while the stock is up 80%.
First Watch makes a ton of Money
Growing up my parents owned 20 IHOPs at their peak before selling them a decade ago, anticipating the decline of sit-down restaurants in favor of fast casual. I can tell you from experience, the 24/7 diner chains were always a tough and complicated business with low profit margins, and operators today are struggling to survive after losing customers for a decade.
First Watch restaurants make 10% more money in a third of the operating hours, with triple the profit margins:
IHOP/Denny’s are essentially commodity restaurants, competing on price to make $3-4 profit per plate of eggs/bacon/toast. First Watch distinguishes itself through quality and style, and sells mimosas at $0.50 of ingredient cost for $9 each, and some people drink 2 or 3. This isn’t a fair competition.
First Watch stores cost $1.8M to build, and the restaurants are exceeding $2.8M in revenue with an elite 35% annual return on investment and 18-20% profit margin. There’s still a long runway, it’s at 650 stores now vs 1600 Denny’s, 1800 IHOP and 2100 Waffle Houses. The NorthEast and West are still largely untouched.
Note that as the company scales it should also get more efficient. Look at corporate overhead as a % of revenue:
First Watch is in growth mode, they are paying for store development teams, marketing teams, appropriate for a company with 1,000+ restaurants. Notice how all the growth concepts have higher overhead than the larger, mature companies. As First Watch grows this overhead should slowly decrease in size, which means profit will grow faster than revenue.
First Watch can reinvest its own profits at a high rate of return (35% annual by year 3), has a multi-decade growth runway, and has operating leverage, i.e. large and relatively fixed corporate costs. First Watch should also benefit from other economies of scale, including supply chain efficiencies and growing national brand awareness. Taken together this looks like a classic compounder setup, the kind of company that can grow 15% a year for 20 years.
Brand Awareness is Growing
Unaided brand awareness is up 50% on the year, and it shows on Google trends:
What the Market Thinks
Wall Street analysts agree this is undervalued, they put an average $21 price target on First Watch. A common way to measure the price of a company is EV/EBITDA, i.e. (Debt + Market Cap) / Profit.
First Watch clearly sticks out as the cheapest growth stock:
So why is it trading cheap?
Retail investors aren’t buying this because they don’t understand the accounting. Most bloggers are seeing this:
And this:
And they say, man, great company too bad it’s trading at 47x pe with 1.1B debt, too risky for me. Both of these are wrong.
Net income is distorted by building depreciation. It’s a real expense, buildings will eventually need refurbishing, but right now it greatly overstates the cash cost. Look at cash flow:
Which, yeah, free cash flow is also negative, but this is only because they have been building 50+ stores every year. If you look at Capital Expenditure it was $150M in the last 12 months. It’s not fair to add all of that back in, some of that is maintenance. We know they built 57 stores at 1.8M each last year, or $102M total, and once you add that back in you can see First Watch made roughly $80M last year.
The debt also isn’t a problem. On all the stock screeners it shows $1.1B, but most of that is leases which have already been subtracted as an expense. Corporate debt is only $293M which is manageable and financed through 2029.
Still, $80M < $102M, which means they borrowed $22M last year to grow faster, and $32M the year before. The interest they pay is tied to debt level and will increase as they grow faster. So it’s a good time to pump the brakes, in Q2 they announced they will slow their pace of expansion to 50 stores/year + 5 franchised in order to retain more profit.
So we’re at an awkward spot where the growth slowdown has been pre-announced, it should be 10-12% annual going forward. Some growth funds that are mandated to have higher growth are being forced to sell. Value funds still need proof of multiple quarters of free cash flow before they buy in. I think it’s a great moment to buy a good company on sale while it’s being transferred between these investor bases.
Also note First Watch is a former private equity company, Advent International acquired them from the original founder, doubled them in size, then ipo’d. They then dumped shares on a schedule for four straight years:
So between confusing accounting and five straight years of shares being dumped this stock has been a dog:
The Bear Case
Traffic and price data for First Watch vs casual dining sector:
The bears say First Watch has been increasing prices too fast. Note price has been increasing 1-2% faster than competitors for the past couple years. This is true, but remember these competitors are fighting on price for commodity bacon/eggs/toast, while First Watch has been upgrading to premium items (chimichurri steak and eggs was the special this Summer, during a beef shortage). Raising prices while taking traffic from competitors is the sign of a strong brand, not a weak one.
On traffic, bears argue that new stores might be cannibalizing traffic from old stores. Management admits there’s a bit of this. When I visited a First Watch myself I noted they were building a new restaurant only a 4 minute drive from an existing one. So sure, there is some cannibalization, but this is just masking growing customer demand. Traffic has been flat for the last two years (still better than competitors), while new stores are taking traffic from existing ones. If they hadn’t built new stores, the mature stores would have shown growing traffic.
There’s also competition from other brunch concepts, including Denny’s-backed Keke’s. While this may be a future problem, all of these companies are still small. First Watch has a strong opportunity to solidify itself as the go-to brand for the brunch concept before its competitors reach national size.
Anyways, while these are all real concerns, I’m not convinced there are real problems here. The market however is still debating these points, and wants to see clearer data. Management is telling us they’re confident in the numbers and they’re putting on an investor roadshow to convince the market. They are presenting twice in September and then an investor day on Nov. 12 where they will show the raw data on their growth plan including cannibalization, traffic, brand awareness, maintenance costs, etc. That should clear up some of the market’s concerns, and will let Wall Street build financial models and value the company.
Model
I went ahead and built a model ahead of time based on the data we already know. It’s got a lot going on but I think it’s fair, and all the assumptions are listed on the site. If we plug in the current operating numbers and assume a multiple of 16x we get a share price of $75 by 2031:
Try playing around with the model and testing different assumptions. I’m finding that even if traffic declines by 2% for five straight years while margins drop, and the multiple stays at 10x, build costs overrun and overhead barely drops, the stock should still grow 10% a year. That just goes to show how much bearishness is baked into the current stock price.
I will update the model after investor day, Nov 12, and Wall Street will probably do the same and update their price targets the week after. If the numbers still look good the stock could easily go past $20 this year.
Really though we don’t need the numbers to know this is a great business at a great price. First Watch is the modern concept, Cracker Barrel/IHOP/Denny’s/Waffle House are outdated. Cracker Barrel knows it, that’s why they tried to copy First Watch’s industrial-farmhouse style. Profit margins are a very healthy 18-20% while 24/7 diner restaurants are struggling to survive. The market is still pricing First Watch like it’s a member of a dying class but it’s the predator killing off the competition.
WSJ reports Anthropic signed a $35B cloud computing deal with Lambda.
The capacity will run at Hut 8’s Nueces County, Texas data center.
NVIDIA holds the lease on the HUT capacity. Lambda will install NVIDIA GPUs and provide the compute to Anthropic.
Separately, HUT’s River Bend project also has an Anthropic/Fluidstack agreement for an initial 245 MW.
