August 2020 Investment Update

Updated: Aug 17

Dear investors and well-wishers,  The fund advanced +6.1% in July, taking us to +33% net for the calendar year-to-date, and +46% net over the last 12 months. Over this period the ASX200 Total Return was down about 8%, so the fund outperformed by over 50%.  We hold over 35 investments, but the top four contributors were the familiar names of Afterpay, Carvana, Tesla and Livongo. 

Since the month end, Carvana has pushed to new highs, crossing the $200 mark for the first time, quite a rise from when we were buying at $36 last year. Here's an update of that chart from last month: 

Our two auto companies, Tesla and Carvana, both managed to grow during the steepest fall in auto sales since 2009, (so their market share grew even more).  


This is a good example of why we bang on about customer love: it translates directly into fundamentals. We expect both Carvana and Tesla to accelerate when pent-up demand in the auto market eventually returns.

Along with Afterpay, Pinduoduo, Shopify, and various software names, it's the fundamentals rather than the share price movements that have been the most impressive. In recent weeks Shopify announced organic growth of 97%, and Livongo announced growth of 125%. MercadoLibre posted growth of over 120% on an FX-neutral basis, and under the surface things were more impressive: Columbia and Chile increased by over 200%, and payment processing across the network grew at over 160%. 

These companies looked overvalued, but now that the numbers are in, it looks like the market got them right.  A few months ago our focus was being entirely invested in companies that were accelerating through the coronacrisis.  There is now a new question top of mind:   To what extent are these changes in behaviour permanent? 


Did these companies simply pull forward future revenue? Or are we witnessing an acceleration of long-trending behavioural shifts that were going to happen anyway?  Figuring out which companies fit the former, and which the latter, is the single most important task at hand right now. 


Examples in E-commerce


Broadly, we believe the growth in e-commerce is here to stay. The combination of - global inventory, - cheaper prices through ruthless search-driven competition, and - greater convenience with door-to-door delivery, is simply too compelling.  The story is even clearer with specialty players like Carvana, which offers a vastly superior customer experience to trundling into a used car dealership. But e-commerce was a prime beneficiary of the coronacrisis, as spending on travel and eating out collapsed, leaving plenty of room for online buying, even as total spending dropped. How much of this will reverse when the various vaccines and treatments arrive? Pehraps the best guide is the most advanced e-commerce economy, China, where penetration is over 40%. This suggests there is plenty of room for e-commerce penetration to double from here, and then double again.   E-commerce penetration in countries like Indonesia, for example, was only 3.4% in 2019. When you consider the youth of the population, the fact the internet itself is still growing, that e-commerce is growing faster still, and that Sea is the local leader gaining market share... we still think it's early days, irrepective of short term market movements. Sea had a mere $18m of e-commerce revenue through Shopee in 2017. It will finish this year around $1.8 billion. But given the low penetration, the rapid rate of growth of the countires and the youth of their respective populations, this is really only the beginning. 


Nevertheless, some companies will soon come under sustained pressure


The past few months saw a mad rush on indoor exercise equipment as it sold out around the country - and not just in Australia. This is the kind of spending that may crash as sharply as it rose, especially now that so many of us have fully stocked indoor gyms. We expect the production ramp up in exercise equipment to lead to the usual place: oversupply, discounted prices and disappointed investors. With that in mind, we have sold out of Peloton, which was a handy contributor this year. We have much higher conviction in other long term opportunities, and have watched plenty of fitness fads come and go, so are happy to watch from the sidelines. What about offence? Which companies are trading today on coronavirus-depressed multiples on coronavirus-depressed revenues, and in a year's time might have significantly higher multiples on higher revenues?  One example is Alteryx, which recently announced 17% growth. Earlier in the year we were excited when they accelerated from 65% to over 75% year-on-year. But with >A$8,000 seats and enterprise clients paying many multiples more for server licenses, this was always an easy cost for companies to cut.  But once embedded, Alteryx quickly becomes a valued part of work flow, as evidenced by customers on average spending more and more each year, and we expect the pent up demand to return by this time next year.

Short-sellers get excited every now and then when they discover Alteryx front-ends more than an even share of their three year contract value, which means their results are more dependent on recent sales than other SAAS companies. This means when sales are weak, results underperform more then a typical SAAS company. But the same is true in reverse. Disney


We have added some ballast to the portfolio by increasing our investment in Disney.


Disney now has over 100 million paying subscribers across its direct-to-consumer products. They have a direct channel to sell content to, such as the new Mulan movie, which can be purchased through Disney+, cutting out the entire cinema complex and dramatically increasing the accessibility and, for a large family, the cost of watching too. 

This is precisely the sort of consumer-favourable move for which the internet is so well-suited.  There's clearly explosive growth in Disney+, true customer love, and market leadership, with a demonstrated ability to convert the universes of Pixar, Marvel, Star Wars and indeed, Disney itself, directly into revenue and profits.  As the parks come back to life, we expect the true value of this firm to be swiftly reflected.  Thinking forward The past week gave a taste of what a growth rotation might look like, with high flying internet infrastructure stocks dropping 25%-35%. A vaccine announcement could result in a more extended move.  We've added to Disney and digital health providers that we expect to benefit from a coronavirus cure, while also running the ruler over every portfolio company. The five year outlook for our portfolio holdings is stronger than ever, so we have left most of our portfolio unchanged. And we would view a rotation as one of those rare and often fleeting entry points into fast-growing, best-in-class technology businsses that are improving our lives so much.  Best wishes

Michael


 

 Contact: michael@fraziscapitalpartners.com

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