Christian Billinger of Billinger Förvaltning presented his investment thesis on Nestle (Switzerland: NESN, US: NSRGY) at Best Ideas 2023.
Thesis overview:
Christian often finds that great businesses “hide in plain sight”. Nestle is an example of this phenomenon. It is a core holding of Billinger Förvaltning, and the more Christian learns about the business, the better it looks to him. Most investors in European equities are quite familiar with the basics of Nestle, so Christian’s presentation focuses on what has changed in recent years to make this an even ore attractive business.
What has changed at Nestle? Like other companies in the FMCG space, e.g. Unilever and P&G, Nestle has for long had a very attractive collection of brands. However, until around five years ago the business saw a long period of declining growth, weak margin progression, and a lack of innovation/portfolio management.
While companies of this size and complexity change slowly and there is always a danger of exaggerating the impact of management changes, something has happened at Nestle since Mark Schneider was appointed CEO in 2017. Since then, the structure and, to some extent, the culture of Nestle have changed, the portfolio has seen meaningful changes, organic growth has reaccelerated, and shareholder returns have improved.
Changes in structure and culture. Going back around five years, there was frustration among many investors at the pace of change and style of communication at Nestle. There was a lot of merit to these claims and the issues resulted in market share losses, etc. The culmination of this was Third Point’s campaign “NestleNOW”, which laid out a number of suggestions to improve operational performance and shareholder returns. While Christian believes some of those suggestions were misguided, e.g. when it came to focusing on margin improvements rather than reinvesting in organic growth and holding up Unilever as an example, it is interesting to see how much the company has changed since then. Christian also agrees with those who criticized Third Point’s approach and Nestle’s response to it.
Mark Schneider joined the group in 2017. According to people who have worked closely with him, he is “getting high marks within the organisation”, he is “willing to listen and change”, is the “first outsider in 80 years which is a positive”, and is “aggressively getting rid of things that don’t fit and adding future growth opportunities”. Overall, very high marks and, importantly, this applies both to operational improvements and capital allocation.
Nestle strikes the right balance between managing “legacy” divisions for cash and having the “capacity to suffer” in higher growth categories like coffee, pet food and health science. This is also the impression Christian gets from people who have worked at senior levels in the company.
Portfolio realignment. A couple of things strike Christian about Nestle’s portfolio. One is the high exposure to food, unlike Unilever, which has diversified more aggressively into beauty and personal care. Despite this and the fact that packaged food is a slow/no growth category in much of the developed world, Nestle has been able to outgrow peers. This is largely due to the fact that they are exposed to the “right” categories within F&B, e.g. coffee, pet food, and health science.
One of the demands from Third Point was that Nestle divest up to 15% of t/o. Mark Schneider has turned over 20% of the portfolio, including disposals of Herta cold meats and U.S. mass waters etc as well as the acquisition of Starbucks retail, which has improved the growth profile of the business.
Growth acceleration. Growth went from 6% a decade ago to ~ 2.5% five years ago. Since 2017 we have seen significant reacceleration (although the data is noisy due to the pandemic). Importantly, expectations for long-term growth have gone from 3/4% to 5%, in line with internal targets. Good opportunities exist to grow faster given the shape of the portfolio. At 6% top-line growth the total return looks attractive indeed.
Coffee is around 25% of revenue, with strong growth dynamics. Pet care is another 20%, with equally strong growth dynamics (accelerated by the pandemic). Together with health science, these fast-growing categories account for more than half of group sales. The portfolio has also premiumized, with higher ASPs. Other important long-term growth drivers are emerging markets (~45% of the business) and e-commerce (~15% of the business, up from 3% a decade ago).
Shareholder returns. The acceleration in growth, combined with continued margin expansion (mix and efficiencies), should enable HSD EPS growth, with further upside from smart decisions around the L’Oreal stake and share buybacks.
Christian believes that investors can achieve 10+% total returns over time at relatively low risk in Nestle given the size and diversity of the business and the financial strength (debt-free, after adjusting for the L’Oreal stake). As a result, Christian considers Nestle a very good fit for the Billinger Förvaltning portfolio.
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About the instructor:
Christian Billinger is an Investor at Billinger Förvaltning, a family-held investment company with no external capital. The simplicity of the setup as well as permanent and patient capital provides Christian with the proper environment to pursue his strategy of identifying long term compounders.
Christian focuses first on the qualities of robustness and resilience which limit downside potential before determining the mix of returns on capital and scope for reinvestment opportunity that accounts for the upside. Often, these factors overlap with family-controlled management teams that more conservatively finance their operations.
Prior to Billinger Förvaltning, Christian worked as a European Equity Analyst for various investments funds. Before that, Christian was an associate at PwC. He holds an MS in Accounting and Finance from The London School of Economics as well as Karlstad University. He is also a CFA charterholder. He splits time between London and Sweden.
Businesses With Strong Underlying Demand and Temporary Difficulties
January 16, 2023 in Best Ideas Conference, Equities, Global, LettersThis article is authored by MOI Global instructor Steven Gorelik, portfolio manager at Firebird Management, based in United Kingdom.
Steve is an instructor at Best Ideas 2023.
The beginning of each calendar year is an opportunity for strategists from major investment banks to confidently predict capital market performance over the upcoming twelve months. At the beginning of 2022, the analysts expected the market to go up by about 1%[1], while at the end, S&P was down roughly 18%. As we enter 2023, the analysts are again predicting an increase in valuations of approximately 3-5% on average.[2] These predictions usually end up wildly wrong, but nevertheless, the process is repeated every year. One of the more famous occasions from the debt markets was the 2019 expectations for the fed funds rate. At the beginning of that year, the market believed there was a 90% chance that the rates would be the same or higher by year-end. Instead of going up, by December, the rates went down by 0.75% due to emerging concerns about the global economy’s health.
I will resist the temptation to join the chorus. Still, I think it is valuable to analyze the main drivers for performance over the last twelve months and to consider what will likely influence stock prices in the near future. While much time was spent analyzing whether the economy is about to enter a recession, last year’s 18% drop in US equity valuations can be fully explained by the increase in the risk-free rate. As a result of a correction, estimated equity returns went up by roughly 3%, but so did the 10-year US interest rate.
For 2023, the market once again expects[3] the fed funds rate to be flat or slightly higher by year-end, though less confidently than four years ago. Futures are pricing with a 60% chance of rate increases and a 13% likelihood that they will be lower by year-end. That said, I will go out on a limb and suggest that the main story in the next twelve months will not be interest rates but corporate profit margins.
Since the 1990’s US companies have increased profitability, as measured by the percentage of GDP, from 5% to 11%. Some of the improvement is explained by changes in the corporate tax rate, which seem to be sustainable (for now). But other reasons for the change, like lower interest rates on debt, corporate efficiency, etc., may prove more fleeting – the same way they did in the 1960s, 1980s and 2010s. At 11%+, corporate profits as % of GDP are more than two standard deviations from the historical average of ~7%.
The profitability has been strong for most of the last two decades, so why raise the concern now? The reason is that I believe that market expectations are becoming increasingly out of touch with reality at a time when the pressures on profitability are building. Low unemployment and potential recession could weigh on corporate margins over the short and medium term. High inflation is another concern, especially considering that historically price rises have negatively correlated with corporate margins.
While the pressure on profits is building, the forward estimates remain blissfully optimistic. Looking at the S&P 500, operating cash flow as a percent of the sale is expected to come in at 17.6% (1.2 standard deviations away from the historical average) in 2023 at 18.8% (1.7 standard deviations away).
At the beginning of 2022, the profit expectations were similarly high but proceeded to come down dramatically over the year – especially for FY 2023, where margin expectations fell from 19.2% to the current 17.6%.
Lower margins may impact stock performance due to negative revisions of short-term expectations and views on longer-term profitability, which feeds through the multiples. Despite last year’s correction, the market multiples remain elevated from historical norms.
In the environment of higher-than-normal profitability and rising pressures, we look for companies that should do well independent of overall market conditions. Historically, the critical ingredient for such investments is identifying businesses with strong underlying demand facing temporary difficulties. Such firms are often undervalued due to short-term uncertainty. This undervaluation gets resolved as business results recover, providing a double benefit to investors.
Case Study: Arista Networks
A recent example of such a situation is Arista Networks, a company that manufactures high-end switching equipment used in data centers. In 2019, their primary customers, Amazon and Microsoft, paused purchasing equipment while working on designs of next-generation data centers capable of addressing ever-growing data storage and transfer needs. Arista’s investors, accustomed to 30%+ annual sales increases, faced prospects of a significant slowdown in revenue growth and voted with their feet sending the shares down by almost 50%.
Meanwhile, company engineers were actively involved in the customer’s design decisions which included their state-of-the-art 400GB switches. In 2021 and 2022, as the global economy was recovering from COVID, networking equipment purchases came back, and so did Arista’s growth. In 2021 sales increased by 27% and are on track to grow by 30%+ this year. At the same time, Arista’s investors that stuck with the company were rewarded with increasing operating margins and share price that is up 3x from 2020 lows.
Case Study: Medifast
Looking forward, I believe Medifast, Inc, could provide similar extraordinary returns if their difficulties are temporary. Medifast is a weight loss management company helping people lose weight through meal supplements and a coaching model. Unlike similar plans, like Herbalife, Medifast’s Optavia is sold by coaches who provide guidance and support.
Medifast historically generated 30%+ growth rates primarily due to an increase in a number of coaches that earn roughly twice of Herbalife distributors without taking on inventory risk.
2022 has been a year of slower growth due to the high base effect of COVID and people’s desire to enjoy life a bit more coming out of the pandemic. As a result, Medifast’s sales are expected to grow in the low single digits, and shares are down by almost 50% over the last year (sounds familiar?). At the same time, the need for weight management solutions has never been greater, with 70+% of the US adult population considered overweight or obese.
Like in Arista’s example, I expect short-term pressures to dissipate and sales growth to reaccelerate to double-digits in the medium term. Medifast has plenty of runway for growth in the United States and hasn’t even started selling its products internationally – a source of up to 70% of revenue for companies like Herbalife and Weight Watchers.
With shares trading at multi-year-lows on EV/EBITDA basis (5x) and free cash flow yield (11%+), I believe Medifast provides a unique opportunity to invest in high-quality business at a reasonable price. History suggests that demand for company products is not particularly sensitive to overall economic conditions and, on the contrary, could prove recession-proof. If the growth comes back, Medifast’s shareholders will be well rewarded for sticking with this company.
[1]https://www.nytimes.com/2022/12/16/business/economy/stock-market-forecast.html
[2]https://www.investors.com/news/stock-market-forecast-2023-challenges-abound-for-sp500-dow-jones-stock-pickers-can-shine/#:~:text=Most%20stock%20market%20forecasts%20for,closed%20the%20year%20around%203840
[3]https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
Liberty Latin America: FCF Growth, Buybacks to Drive Equity Upside
January 16, 2023 in Audio, Best Ideas 2023, Best Ideas 2023 Featured, Best Ideas Conference, Diary, Discover Great Ideas Podcast, Equities, Ideas, Member Podcasts, TranscriptsNitin Sacheti of ARS Investment Partners / Papyrus Capital presented his investment thesis on Liberty Latin America (US: LILAK) at Best Ideas 2023.
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About the instructor:
Nitin Sacheti runs Papyrus Capital GP LLC where is he the Portfolio Manager. He is also the author of Downside Protection: Process and Tenets for Short Selling in All Market Environments.
Prior to founding Papyrus Capital GP LLC, Nitin was a Senior Analyst/Principal at Charter Bridge Capital where he managed the firm’s investments in the technology, media and telecom sectors as well as select consumer investments.
Before Charter Bridge, Nitin was a Senior Analyst at Cobalt Capital, managing the firm’s technology, media and telecom investments and a Senior Analyst at Tiger Europe Management. Nitin began his investment career in 2006 at Ampere Capital Management, a consumer, media, telecom and technology focused investment firm, initially as a Junior Analyst, later becoming Assistant Portfolio Manager.
He graduated from the University of Chicago with a BA in Economics, was a visiting undergraduate student in Economics at Harvard University and attended the Loomis Chaffee School.
Liberty Braves: Growing Monopoly With Unappreciated Catalyst
January 16, 2023 in Audio, Best Ideas 2023, Best Ideas 2023 Featured, Best Ideas Conference, Diary, Discover Great Ideas Podcast, Equities, Ideas, Member Podcasts, TranscriptsChris Colvin of Breach Inlet Capital presented his investment thesis on Liberty Braves (US: BATRA, BATRB, BATRK) at Best Ideas 2023.
Thesis summary:
Liberty Braves is a tracking stock that represents Liberty Media’s ownership in Atlanta Braves Holdings. Holdings consists of the Atlanta Braves baseball team and the real estate surrounding the Braves ballpark (Battery Atlanta).
The Braves is an attractive and unique asset because it is a monopoly with high barriers to entry, recession-resilient, and has multiple secular growth tailwinds.
Liberty Braves trades at a material discount to comparable private market transactions. However, Liberty Media recently announced plans to split off Liberty Braves into a standalone public company to be renamed Atlanta Braves Holdings. This split-off should immediately help close the valuation discount, and the company should then be taken private in 6-24 months at a premium.
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About the instructor:
Chris Colvin, CFA, is the Founder of Breach Inlet Capital. Prior to Breach Inlet, he was the Portfolio Manager at Freeman Group (a family office), where he launched and managed a concentrated public markets portfolio. He also led diligence and was a board member for private equity investments. Before Freeman, he was a Senior Analyst at Highland Capital Management, where he managed a portfolio of distressed credits and a long/short equity fund. He began his career as an investment banking analyst at Stephens, where he also helped evaluate private equity investments. He graduated from Wake Forest University with a BS in Business.
In our new episode, @pcordway, @ElliotTurn, @JMihaljevic discuss the private equity asset class and the dangerous game of “volatility laundering”, a concept popularized by @CliffordAsness. Enjoy!
https://t.co/wPcULrrK0s— This Week in Intelligent Investing (@twiii_podcast)
Jan 15, 2023
Interesting, I wrote an essay for @manualofideas on this same theme 5 years ago – The Impact of Technological Change on the Firm Boundary https://t.co/mgsmZKRNI9 [March 2018] https://t.co/adFFjjswND
— Rajeev Mantri (@RMantri)
Jan 15, 2023
Thinking in First Principles: Focusing on Duration in Equity Investing
January 14, 2023 in Best Ideas Conference, Equities, Global, LettersThis article is authored by MOI Global instructor Ben Beneche, co-founder and portfolio Manager at Tourbillon, based in London.
Ben is an instructor at Best Ideas 2023.
“Although competitive advantage period has unassailable importance in valuation, it is a subject that has not been explicitly addressed in finance textbooks in a way commensurate with its importance.” –Michael Mauboussin & Paul Johnson, Competitive Advantage Period: The Neglected Value Driver
“Look beneath the surface; let not the several quality of a thing nor its worth escape thee.” –Marcus Aurelius, Meditations
“Time isn’t the main thing. It’s the only thing.” –Miles Davis
Context
At the heart of the 24/7 news cycle and vast amounts of trading in public securities lies a simple, often forgotten fact: equities represent part-ownership of a business over its lifespan. While we understand the temptation to equate shrinking holding periods with investor short-termism, we view asset prices as discounting future fundamental expectations over the long-term. Even short-term price moves can be framed through the lens of implied probabilities of future outcomes 10+ years into the future.
A simple thought exercise illustrates this. It is not at all unusual to find companies trading at a 5% cash flow yield (20x P/FCF multiple) growing at 4%. If one were to buy the company outright (in a ‘take private’ transaction) and hold it ‘forever’, it would take about 15 years to simply break-even on the investment from the cash generated and distributed to owners. And this doesn’t even embed the opportunity cost of equity capital! It is axiomatic that it is the long-term cash generation of a business over decades that determines shareholder value (and in turn, share prices).
Independent statistics point to the typical age of an S&P500 company being just above 20yrs (down from the 35yrs in the mid-1970s[1]). This means that at typical valuations, investors need to make judgments about the entire cradle-to-grave lifecycle of a company. In a context such as this, it is even more important that investors pay attention to assessing the competitive advantage period (the period over which a company earns super-normal returns on investment) and find assets which can endure. Longevity is a vital component of quality.
The spectrum of quality
The prevailing economic theory surrounding the ‘competitive advantage period’ suggests that there are certain industries where companies have disproportionately high odds of delivering persistently high returns on capital. The table alongside is typical of the results produced by academic studies of corporate performance and valuation theory.[2]
Given this, it is natural that students of quality business models are drawn to industries near the top of the table that seem to be ripe hunting grounds for consistent compounders. We submit however that duration can be found in somewhat opposing corners of the business world. They can be in highly consolidated industries or in their exact opposite – highly fragmented industries. Paradoxically, the opposite of a good industry can also be a good industry to find durable assets. Like with many discoveries in the natural sciences, there is even an aesthetic quality to this fundamental truth.
Same but different
To illustrate, consider select enterprise software juxtaposed with select retailers. The many attractions of the former and the enormous entry barriers seem evident as offering true ‘duration.’ Retail is not as glamorous an industry – there is largely no differentiation in the products being sold and these are companies selling everyday essentials with no venture capital dollars chasing world-changing innovation. Nevertheless, we think from the perspective of ‘duration’, even the apparent differences lead to similar longevity.
A more generalizable pattern can be drawn out here.
There are some industries with high entry barriers which have duration, e.g., enterprise software, infrastructure assets, aerospace, medical devices, select consumer brands. We could refer to these as ‘Distinctive’ businesses and the common features here tend to be some form of products or services which have no close substitutes (real or perceived). The natural evolution of these industry structures tends to be oligopolistic (or even monopolistic) with high margins and significant barriers to entry. Students of Warren Buffett will recognize Moody’s, See’s Candies and Burlington Northern as exemplars of this.
However, there are some industries with low entry barriers which can and do house idiosyncratic companies which also have high duration, e.g., retailers, insurers, banks and homebuilders. We could call these ‘Commodity’ businesses. Our observation is that they are almost always structurally low-cost operators (usually with a management team and culture that safeguards and reinforces this) who consistently and persistently take share allowing a long reinvestment runway and duration. Amazon, Ryanair, and the early Wal-Mart spring to mind.
The underlying risks and points of fragility across three important facets (new entrants, growth runway/market shares and management) are an interesting study in contrasts too. These become important considerations as you are building duration into your portfolio in two very different ways.
New entrants. The key threat to quality (and hence value) in ‘Distinctive’ businesses tend to be new entrants that disrupt the monopoly or oligopoly characteristics of the businesses. These could be demand-side (consumer behaviour shifts that diminish market shares for a product or service – say, TikTok and its effect on Meta/Netflix) or supply-side (a new entrant offering a cheaper or better alternative – Adobe/Figma comes to mind). On the contrary, in ‘Commodity’ businesses, the risks one worries about are not so much from new entrants. Whereas new entrant risks tend to be keenly watched in enterprise software, you fret less about supply-side risks in owning Costco, as there is plenty of competition in retail!
Penetration and growth runway. These end to be more easily observable in ‘Commodity’ businesses too, since the quality thesis rests on consistent and persistent improvement in market shares. Whereas this is the exact opposite if you’re the industry standard in an enterprise software workflow – you’re already a dominant market share holder and that is the very feature that underpins duration.
Managerial culture. Tends to be disproportionately important in ‘Commodity’ businesses. Disciplined capital allocation, a long-term view and obsession on customer value must remain front and centre. Failure to do this will generally have dire consequences. Think of low-cost airlines expanding into new unprofitable routes, insurers writing dubious contracts to grow premiums or a retailer selling shelf space to the highest bidder rather than offering the best value product to consumers. ‘Distinctive’ businesses tend to emphasize the robustness of the business model with surplus profits generally re-invested into defending their position, through R&D or advertising for example.
Many roads lead to duration
We find it fascinating that duration can be found both in companies operating in industries with high entry barriers, monopolistic market shares and very high margins as well as those with low entry barriers, fragmented industries, and low margin structures. The very best “commodity” businesses turn the very fragility of operating in a difficult industry into a strength.
Franco-Nevada operates in a commodity industry (quite literally). As a streaming and royalty company in the precious metals space, its fate should have been mediocre. But the business model found a way to turn the very weaknesses of extractive commodity industries (high capital requirements, unpredictable op-ex, limited optionality) into strengths by being exposed to the opposite side of all the poor characteristics typical of miners. It takes no op-ex risk, has perpetual exploration upside without putting up new capital and has created an oligopolistic structure thanks to the intangible reputational entry barriers it has erected around itself. The result is that it has free cash flow margins that are multiples of Alphabet.
Once this truth is internalized, we see deeper patterns within business models that underpin durability. Costco is a retailer but has customer retention rates akin to the best enterprise software companies. The management clearly understand that their business is a ‘volume game’ rather than a ‘margin game’. This leads to better long-term growth, associated scale economies and, crucially, around 30% ROE despite the razor thin margins they operate at. Low margins don’t mean poor economics. Cosmos Pharmaceutical in Japan has a similar approach, managing their business to a 20% GPM (with no membership) to offer the best possible value to consumers. Despite the, perhaps obvious, benefits of this approach, very few retailers globally follow this model as it requires short-term pain (lower margins) for long-term gain (durability, growth, and cash generation).
This brings us back to the importance of managerial culture. We would argue that Berkshire Hathaway clearly demonstrates the power of a culture, structure and an incentive structure which prioritise deferred gratification. This is evident at Burlington Northern which has lower margins and higher cap-ex than its main competitor Union Pacific (and is gaining volume share as a result); at Geico which continues to gain share by re-investing its low cost base into superior pricing; at Berkshire Energy which is investing all of its available capital (and more) into long dated renewable assets; and at the re-insurance business whose ratio of surplus capital to premiums is multiples of its peers as their culture emphasises profitability and resilience over premium growth.
Although we will always be on the look-out for “distinctive” companies operating in rational oligopolies, widening the aperture of our analytical framework has allowed us to develop a focus on duration, which we believe is the deep truth of equity investing. Many roads lead to Rome, and thinking in first principles can isolate the underlying features behind industries and investments that lead to duration.
[1] Source: Statista, 2021
[2] Some of the highest quality literature on sustainable competitive advantages and the persistence of supernormal returns on capital can be found it a few sources: (1) Credit Suisse HOLT Corporate Performance Handbook; (2) Prof. Aswath Damodaran’s work at NYU Stern; (3) ‘Valuation: Measuring and Managing the Value of Companies’ by Koller, Wessels et al (‘the McKinsey valuation book’)
“The only reason people do not know much is because they do not care much. They are incurious. Incuriosity is the oddest and most foolish failing there is.” —Stephen Fry
— John Mihaljevic (@JMihaljevic)
Jan 13, 2023
Amazon: Value Hiding in Plain Sight (Best Ideas 2023 Preview)
January 13, 2023 in Best Ideas Conference, Equities, Global, LettersThis article is authored by MOI Global instructor Edward Chang, portfolio manager at Pledge Capital, based in New York.
Edward is an instructor at Best Ideas 2023.
Amazon needs no introduction in the value investing community. Berkshire bought a stake back in 2019. It may have one of the widest moats in the world.
After falling $100 from the highs, the stock now trades where it did in 2018. Since then, they have built Amazon Ads into one of the biggest digital ad players in the world. AWS has grown from twenty billion in revenue per annum to eighty. 3PL marketplace revenue has nearly tripled. They have added one hundred billion in 1PL ecommerce sales. Subscriptions, which is mostly the prime membership, has grown from fourteen billion to thirty-five.
If you value the cloud and the ad business separately, at four to five times revenue or sixteen to seventeen times EBIT, it will imply the rest of the company trades at the lowest valuation in history – around 0.6x sales. Including the Great Recession. You do not need to make herculean assumptions to project strong five-year investment returns.
Amazon bulls are battered. The debate is now centered around the quality of the ecommerce business. On the sell-side, analysts are beginning to question if the cloud is maturing. Many investors are even hoping Bezos will come out of retirement. It is not often a blue-chip company with Amazon’s moat declines 55% in a year. I believe this is a great long-term buying opportunity.
What attracts me to the stock, is in part the culture that Bezos has built during the tenure. The door desk mentality differentiates Amazon from the rest of the internet giants. Culturally, I believe they are better prepared for a sustained period of belt tightening. The company’s customer obsession will also get it through tough economic times and emerge out of the other side stronger. Andy Jassy, the CEO of Amazon, has gone through this before and had a front row seat as Jeff Bezos’ shadow during the tech bubble. He watched Amazon launch the 3PL business, which threatened 1PL sales but delighted customers with low prices and helped Amazon turn a profit. Amazon’s customer obsession can still be witnessed in the strategic changes being made to position the company for the next 5-years.
With Amazon’s core ecommerce business, customer obsession shows in the launch of Buy with Prime. This new service brings Prime benefits to the far corners of the web. While some of us have heard of some of the brands or sites in the long tail of built on Shopify, Wix, or WordPress, most of us have not. These sites lack the trust Prime and Amazon have developed with consumers. Amazon is now offering to share the trust it earned with prime members with external website. Amazon will provide prime services on other websites. This could greatly expand the value proposition of its popular membership program. It also helps merchants, by boosting their conversion and by providing ecommerce fulfilment and shipping services.
With AWS, customer obsession is showing in the company’s pivot from a builder (or developer) first mindset to a focus on both partners & builders. Earlier in the cloud transition, AWS could please the customer by adding more features and tools for developers to build cloud applications. As we move into the next stage, AWS’ large portfolio of tools and features confuse customers in the early majority. Fortune 500+ companies typically work with consultants or system integrators, and AWS is strengthening its go-to-market with these partners to help the end customer find the right solution.
AWS’ investments to strengthen its partnership with independent software vendors also fulfill the same purpose. It is another example of the company’s customer obsessed culture. The ISVs used to view Amazon as a competitor or frenemy, who offered low-cost versions of their software. Amazon and many ISVs had rocky relationships, because Amazon copied features or even offered services built on the open-source software of other companies. Over the last year, AWS has invested to strengthen these relationships. There is no one size fits all, and what works for one set of customers may not work for another set of enterprise customers. Customer obsessed strategic moves will help AWS capitalize on the next leg into the cloud.
Amazon has made extremely large investments into fulfilment and continues to invest heavily into AWS. Investments to enable next-day delivery of a greater number of SKUs around the world, have required them to densify their logistics network by opening sortation centers and delivery stations. Amazon has also needed to make a major investment in working capital, to fill these sites and get product closer to their end customer. AWS is amid a large capex cycle, as the company seeks to fulfill long-term agreements made with customers looking to move more of their IT infrastructure into the cloud. Ultimately, we believe these investments will pay off for shareholders.
Around ~15% of retail sales have moved online and ~10% of IT spending has moved into the cloud. Ecommerce and cloud will not capture 100% of their respective markets, but there is still plenty of room for both businesses to grow. Amazon’s customer obsession gives me confidence that management will make the right strategic moves to widen its moat and enable the company to capitalize on its long-term opportunities.
At Pledge Capital, we look for companies that are investing to strengthen their position through some sort of fundamental inflection point. We typically invest in small and mid-cap businesses. However, the large declines in the FAANG stocks have created some compelling opportunities. We especially like Amazon’s long-term prospects given its culture and recent strategic moves. This is a great time for long-term investors.
Mohnish Pabrai on Intelligent Investing Globally in 2023 and Beyond
January 13, 2023 in Audio, Best Ideas 2023, Best Ideas 2023 Featured, Best Ideas Conference, Diary, Equities, Ideas, Invest Intelligently Podcast, Member Podcasts, The Manual of Ideas, TranscriptsIn a keynote Q&A with John Mihaljevic at Best Ideas 2023, superinvestor Mohnish Pabrai discussed his latest thoughts on intelligent investing around the world. Mohnish reiterated some of the key tenets of his investment philosophy and shared some of the opportunities he sees in global markets as we enter 2023.
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About the instructor:
The Pabrai Investment Funds (PIF) were inspired by the original 1950s Buffett Partnerships and are a close replica of the original Buffett Partnership Rules. The Pabrai Funds Managing Partner, Mohnish Pabrai, is an ardent disciple of Warren Buffett and closely follows Buffett’s principles on value investing and capital allocation. From inception in 1999 through September 2022, a $100,000 investment in Pabrai Funds had grown to $1.1 million (after all fees and expenses). This equals to an annualized gain of 10.7% versus less than 6.2% for the S&P 500.
Mohnish was the Founder/CEO of TransTech, Inc. – an IT Consulting and Systems Integration company. Founded in his home in 1990, Mohnish bootstrapped the company to over $20 million in revenue when it was sold in 2000. TransTech was recognized as an Inc. 500 company in 1996. Mohnish has been profiled by Forbes and Barron’s and appeared frequently on CNN, PBS, CNBC, Bloomberg TV and Bloomberg Radio. He has been quoted by various leading newspapers including USA Today, The Wall Street Journal, The Financial Times, The Economic Times and The Times of India. He is the author of two books on value investing, The Dhandho Investor and Mosaic: Perspectives on Investing. The Dhandho Investor has been translated into German, Mandarin, Japanese, Thai, Korean, Vietnamese, and Spanish.
Mohnish is the winner of the 1999 KPMG Illinois High Tech Entrepreneur award given by KPMG, The State of Illinois, and The City of Chicago. He is a member of the Young President’s Organization (YPO) and a charter member of the IndUS Entrepreneurs (TiE).
Mohnish is the Founder and Chairman of The Dakshana Foundation which is a public US 501c(3) charity. Dakshana focuses on poverty alleviation through education. Dakshana alleviates poverty by identifying brilliant but impoverished teenagers and providing intensive coaching for 1-2 years for the IIT and medical entrance exams in India. Since inception in 2007, the IITs have accepted 3015 Dakshana Scholars. Since inception, 4095 of our scholars have been accepted by the IITs, AIIMS, and various medical colleges (out of a total universe of 6290), a success rate of 65%. Since 2017, various government medical colleges have accepted 1080 Dakshana Scholars, including 222 at AIIMS, the Harvard Medical School of India.
Mohnish loves playing duplicate bridge and received his first lifetime ban in 2019 from playing Blackjack at a Las Vegas Casino due to his winning blackjack system. He lives in Austin, Texas.