Daniel Loeb (Trades, Portfolio) launched Third Point LLC in 1995. He personally heads the firm's research activities, portfolio and risk management and is infamous for his sometimes acidic letters to the management and/or boards of directors of companies.
Third Point recently released its second quarter 2020 letter. Loeb is among the investors I keep a close eye on. It can be interesting to coattail his activist investments as he is very successful in that arena. Something else I've come to admire is his ability to be flexible. Loeb historically engaged in a lot of special situations and value investing. The activism was borne out of a desire to create a catalyst to unlock value.
One transition he made years ago is to add in stocks of companies that are "compounders," i.e. those that are good at compounding capital. In this latest letter, Loeb spends a lot of time on compounders, as he identified several new opportunities in this category.
Loeb starts off by laying out why he likes compounders and how they fit into the overall portfolio (emphasis by me):
"Investing in "quality" companies or "compounders" is not a new endeavor for us but a long? time category. Some of our most successful investments that have doubled or tripled during the lengthy periods of our ownership including S&P Global, Visa, Danaher, Adobe, Salesforce and Sherwin Williams can rightly be described as such.To be clear, investing in compounders and event?driven situations are not mutually exclusive activities. It has been our experience that our event?driven focus provides us with a unique window into the creation or evolution of a quality company, since they are often born out of corporate events or management changes."
Loeb predicates this investment on a bright outlook for Alibaba and the broader Chinese e-commerce market. He believes that volume will grow at a mid-teens CAGR over the next five years. The Chinese are increasing their consumption per capita, which is a tailwind. If China were ever to reach the consumption per capita of the U.S. then its total addressable market would be four times the size of the U.S. retail market. Loeb also points out that Covid-19 increased e-commerce penetration of retail.
But Loeb doesn't think Alibaba will merely enjoy that tailwind. He also thinks it will benefit to an outsized extent:
"As the e-commerce market matures, we believe Alibaba & JD will leverage scale and growing repositories of transaction data to increase monetization of their platforms through targeted advertising to improve revenue yields (revenues as a percentage of GMV) from a starting point of less than 4% today."
Another exciting avenue for Alibaba to grow beyond expectations is in its cloud business. Amazon Web Services (AWS) has famously been an incredible tailwind for Amazon. Loeb believes Alibaba has a shot to follow the Amazon playbook and become the backbone provider of China's cloud business.
"China's cloud computing industry remains nascent but is growing nearly 3x faster than its developed market counterparts through a combination of rising IT intensity, rapid cloud penetration, and a gradual moderation in software piracy. Within that market, Aliyun is increasingly dominant (with nearly 50% market share) and will generate dramatic profit growth as margins expand with scale. As one reference point, Aliyun today resembles Amazon`s AWS business five years ago; this is an encouraging comparison given that today, AWS` operating profits (and estimated enterprise value) exceed Alibaba`s business in its entirety."
Alibaba isn't an easy buy for a value investor, in my opinion. It sports a market cap of $670 billion and trades at 26 times free cash flow.
Disney is the subject of quite a bit of investor anguish as of late. Loeb points out there's been a slew of Wall Street sell-side analyst downgrades. Concerns about the theme parks, ESPN and lack of theatre going attract a lot of attention. Loeb believes what's getting lost is that the pandemic means Disney can more easily try and catch up to Netflix (NFLX) with its streaming platforms. In his mind, it is this business that is the pre-eminent Disney property and most important to its future success. Netflix's market cap, which is only a hair away from Disney's, certainly suggests so.
"Streaming is Disney`s biggest market opportunity ever with potentially $500 billion of revenue spread across over a growing market of 750 million current broadband homes globally ex?China, dwarfing the size of Disney`s current addressable markets (roughly $100 billion between global box offices and theme parks)."
Disney already managed to capture 60 million subscribers globally, a feat that took Netflix seven years. Loeb is further emboldened because the new CEO Bob Chapek identified Disney's direct-to-consumer business as a "top priority." Loeb sees evidence for this focus in the premiere of Mulan through the Disney+ platform.
Loeb only started investing in Amazon in March, having missed the entire run up to that point. Amazon actually didn't sell off much in March. It was roughly flat at that point. Loeb reasoned it was a buying opportunity given the increase in e-commerce, and he figured that increase would be sticky. A temporary boost in revenues often doesn't move the needle in terms of valuation. He believes it isn't just the e-commerce part that's getting a boost but AWS as well:
"The COVID-19 pandemic is also helping to accelerate the adoption of Amazon`s cloud computing services because they are a critical enabler of remote work, a trend that will similarly outlast the virus."
Disclosure: no positions
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