Path 05 · 6 min read
Reading a tech moat through five numbers
Tech businesses look similar from the outside — software, screens, services, AI. They behave very differently underneath. Five numbers on the income and cash flow statements tell you almost everything about which kind of tech business you're actually holding.
This path takes them in the order that builds a picture: how much of every sales dollar gets reinvested into the next product, how much ends up as cash, how much is being sunk into long-lived assets, and how much is being paid to employees in equity rather than cash. The fifth — gross margin — anchors them all.
Start with the most basic cost-structure read — how much of every sales dollar survives the direct cost of producing the thing sold.
01Gross margin
Revenue minus cost of goods, divided by revenue. The share of every sales dollar that survives the direct cost of producing the thing sold.
Now the forward look: how much the company is reinvesting into product. The level matters less than the trend.
02R&D intensity
Research-and-development spending as a percentage of revenue. The share of every sales dollar a company reinvests into its next product.
R&D intensity is annual R&D expense divided by revenue, expressed as a percent. In hardware-heavy or platform tech, single-digit R&D intensity at scale (Nvidia's ~9%) means the company is profiting on a moat already paid for. Double-digit or higher (Meta ~27%, Snowflake ~45%) means meaningful future product is still being built and the income statement is reflecting that.
Read the trend, not the level — R&D intensity climbing while revenue growth slows is a different story from intensity that compresses as the business scales. Compare within sub-sector: SaaS at 20% looks normal; a megacap consumer-internet company at 27% is unusual and worth understanding.
The cash version of profit. GAAP earnings can be flattered by SBC; cash flow can't.
03FCF margin
Free cash flow divided by revenue. How many cents of cash the business actually keeps for every dollar of sales, after capex.
FCF margin is operating cash flow minus capital expenditure, divided by revenue. It is the cleanest one-line read of cash quality — a high-margin software business should print 25%+ FCF margins at scale; a capex-heavy cloud or chip business will run lower because the buildout absorbs the cash.
FCF margin tells you whether the GAAP income statement is hiding something the cash flow can't. Stock-based compensation flatters GAAP earnings but doesn't move cash, so a company with high SBC and low FCF margin is a different business from one where both lines agree.
For platform tech in the AI build cycle, capex intensity is often the single most-watched line on the chart.
04Capex intensity
Capital expenditure as a percentage of revenue. How much of every sales dollar the company is sinking into long-lived assets — data centres, fabs, factories.
Capex intensity is capital expenditure divided by revenue. For platform tech in the AI build cycle it's the single most-watched line: hyperscalers running capex intensity in the mid-20s%+ (vs. historical 12–15%) are betting that future revenue justifies today's spend.
High capex intensity is not inherently bad. The right way to read it is alongside the backlog (RPO) and the customer base — capex pulling forward to meet contracted demand reads very differently from capex pulled forward on hope.
And the non-cash cost that drives the gap between GAAP earnings and the 'adjusted' numbers companies prefer.
05SBC intensity
Stock-based compensation as a percentage of revenue. The non-cash cost that drives the gap between GAAP and adjusted earnings.
Stock-based compensation is the value of equity grants to employees, expensed on the income statement but not actually paid in cash. SBC intensity (SBC ÷ revenue) is the standard cross-company read.
SBC dilutes shareholders even if it doesn't move cash. A growing SBC line means a growing share count over time — the per-share earnings denominator gets bigger. Watching SBC intensity alongside FCF margin is the cleanest way to know whether 'adjusted' earnings are flattering the picture.
Five numbers, read together. A high-gross-margin business with low R&D intensity and high FCF margin is mature; one with high R&D and a swelling capex line is in the middle of a bet; SBC dilutes the per-share story silently. Reading just one of the five misleads — reading all five is the point.
Quick check
Did it stick?
3 questions · pass at 3/3.
1. An R&D intensity of 9% for Nvidia signals…
2. Why does FCF margin matter even when GAAP earnings look strong?
3. Capex intensity at a hyperscaler stepping from 14% to 24% YoY most likely means…