Advertisements
InvestorAlmanac

InvestorAlmanac

  • Smart Money
  • Investing
  • Energy
  • Lessons/Primers
  • News
  • Market Cheat Sheet
  • Job Interview
  • People

Saber Capital: Common Denominator of Tencent, Facebook, Google

Smart Money
June 11, 2018 InvestorAlmanac
  • There are two types of companies in the investable universe:
    • A: those that are growing their intrinsic value over time
    • B: those that are shrinking their intrinsic value over time
  • Within Bucket A, there are two sub-categories:
    • Compounders: growing companies with a long runway
    • Stalwarts: durable, mature companies at a discount
  • Large-caps get mispriced (% change between 52-week high/low): Apple (49.4%), Google (53.4%), Microsoft (42.5%), Exxon (37.3%), Amazon (71.6%), Berkshire (19.4%), Facebook (68.1%), Johnson & Johnson (43.9%), GE (68.4%), AT&T (35.5%)
  • What do all of these companies have in common? Facebook, Amazon, Netflix, Google, Tencent, jd.com
  • Most important moat
    • Technology touches all industries today
    • Change is much more inevitable and occurs much more rapidly
    • The most effective antidote to “disruption” is a management team that is driven by something larger than profits
    • A company that is motivated to provide great value for its users and customers has the potential to establish a long-term advantage over the vast majority of companies that manage their businesses for the short-term
  • Why does culture get “mispriced”?
    • Everyone knows that providing value to customers is important, but actually doing this can cause short-term pain
    • Very few companies have the structure for such long-term focus
    • Because of these structural hurdles and near-term incentives that drive behavior, culture can’t be easily copied by competitors
  • Network Effects
    • Facebook has 2 billion users and 70 million businesses on its namesake platform
    • WeChat has 1 billion users that are highly engaged (spending over an hour a day)
    • Google has the most comprehensive index and best search product, which has led to billions of users for its search, browser, email, maps, and other products
    • YouTube’s 1.3 billion users watch over 1 billion hours on the platform every day
  • Feedback Loops
    • Data Feedback Loop: a good product leads to more users, which provides more data, which improves the product, which leads to more users, and still more data, etc
    • Price/Volume Feedback Loop: low prices lead to more customers, which leads to cost savings from suppliers, which can be passed to customers, which brings in more volumes, and lower prices, etc
  • Large Markets
    • All of the companies operate in markets that Buffett would call “inevitables”; dominant positions in fast-growing industries: digital advertising; e-commerce; payments; cloud; media; gaming
  • ROIC
    • These companies are making investments in data centers, technology, warehouses and other growth oriented investments, but they require very little capital to grow
    • Ad platforms like WeChat, YouTube, Google, and Facebook have massive incremental margins
  • Rapid Growth
    • The combination of strong moats, large and fast-growing markets, and very low capital requirements has led to explosive growth
    • Growth rates will slow down going forward, but will likely continue to be significantly greater than the average company for many years to come
  • Under-earning
    • Facebook: Instagram produces only a small portion of FB’s revenue, and WhatsApp & Messenger have over 1 billion users but produce no revenue yet
    • Tencent: very profitable overall, but WeChat only does ~$4Bn in ad revs (compare to $40bn at FB); other areas such as payments, cloud, and media content have lots of potential
    • Google: core search is a 40%+ margin business; YouTube shows over 5 billion videos a day and climbing; Cloud is a $4Bn business in an industry that will be hundreds of billions; Waymo? Health care? AI technology? Hardware and IoT?
    • jd.com: “Rent” their infrastructure (third-party sellers, third-party logistics)

Tencent – A Huge Moat in China

  • Buffett’s “Inevitables”
    • Companies that Buffett felt were sure to do well over time due to structural competitive advantages
    • But some of these structural advantages have been eroded, due to unforeseen technology
    • Today’s inevitables are not companies that are resistant to change
    • Today’s inevitables understand change and can adapt, while always focused on customer value
    • Google, Amazon, Facebook exhibit these qualities
    • There are also numerous “inevitable” companies today in China
  • Inevitable Trend in China
    • These companies benefited from “walled-garden” internet in China
    • They’ve benefited from a rising middle class that is using the internet more, and spending more online
    • Internet usage will certainly grow and thus online ads, e-commerce, and mobile payments will follow suit
    • Unlike the airlines in the 1950’s, this “inevitable” industry will create massive profits for its winners
  • What Does Tencent Do?
    • Digital Advertising: 1 billion highly-engaged users on WeChat
    • Video Game Publishing: high margin, high ROIC business that throws off significant FCF
    • Mobile Payments: WeChat Pay is one of the largest mobile payment platforms in China
    • Media Subscriptions: 135 million people subscribe to Tencent’s news platforms, music, movies, video, and original content
    • E-Commerce: Tencent is a partner & minority owner of jd.com; WeChat is a potential e-commerce hub
  • Highly profitable & growing fast: growth has actually accelerated in the past couple years; Revenue: 40% 5-yr CAGR and 56.5% y-o-y growth; Pretax profit: 42.4% 5-yr CAGR and 70.8% y-o-y growth
  • Why Tencent is a Great Business to Own
    • WeChat’s Network: used by everyone in China; chat, payments, work groups, social, shopping, money transfers, hailing cabs, paying bills, and much more
    • Massive Runway: leader but still has a very small slice of large, growing markets such as mobile advertising, ecommerce, payments, media content, cloud and games
    • Great Businesses: high margins, fcf, recurring revenue streams, low capex
    • Founder/Operator: focused on creating maximum long-term value
  • Tencent’s Long Runway
    • Mobile advertising: $50bn market that is rapidly expanding in China
      • WeChat did roughly $3.5Bn from ad revs in 2017 (FB’s $39Bn or Google’s $95Bn in annual ad rev)
    • Digital content; e-commerce; payments; video games; cloud
    • These are very large and fast-growing markets that Tencent is well-positioned for, but has barely scratched the surface in terms of monetization
  • Valuation
    • $475Bn market cap at $50/share
    • $60Bn of excess net cash and investments
    • 2018 P/E (ex-cash): 26x
    • Last year’s earnings growth: 70%
    • Facebook’s valuation: $490Bn market cap at $166/share; 2018 P/E (ex-cash): 20x; last year’s earnings growth: 63%
    • Alphabet’s valuation: $756Bn market cap at $1073/share; 2018 P/E (ex-cash): 23x; last year’s earnings growth: 22%
  • Summary
    • Tencent, Facebook, and Google are very reasonably priced given their significant competitive positions and growth potential
    • They have valuation multiples that are similar to firms such as McDonald’s and Coca-Cola
    • Market’s “pendulum” has begun to swung, but hasn’t swung far enough with these stocks

Saber Capital: Discussion with Markel, John Huber

Image Source: Saber Capital Management

Advertisements
  • Click to share on Facebook (Opens in new window)
  • Click to share on Twitter (Opens in new window)
  • Click to share on LinkedIn (Opens in new window)
  • Click to email this to a friend (Opens in new window)
  • Click to print (Opens in new window)

Also Read

Tagged $AMZN $FB $goog $googl $JD $NFLX $TCEHY 52-week high to low large caps berkshire hathaway high to low buffett inevitables china internet walled-garden faang network effect faang underearning facebook underearning google underearning jd.com underearning john huber saber capital large-cap mispriced large-cap mispricing saber capital 1q18 saber capital amazon saber capital apple saber capital berkshire saber capital disruption risk saber capital ecommerce saber capital facebook saber capital google saber capital important moat saber capital investable universe saber capital jd.com saber capital john huber saber capital large caps saber capital mispricing saber capital moat saber capital netflix saber capital presentation saber capital presentations saber capital tech stocks saber capital technology stocks saber capital tencent saber capital tencent growth saber capital tencent presentation saber capital tencent underearning saber capital wechat sabercapital feedback loop tech stocks network effect tencent china tencent digital advertising tencent ecommerce tencent feedback loop tencent growth cagr tencent investment thesis tencent investment thesis valuation tencent jd.com tencent media subscription tencent mobile payments tencent network tencent network effect tencent runway tencent underearning tencent undervalued tencent valuation tencent video game publishing tencent vs facebook walled-garden internet warren buffett inevitables wechat network

Post navigation

[Technical] PIK Security – Impact on the Three Statements
Howard Marks: Passive Investing, Quantitative Investing, Impact on Investing

Related Posts

Coho Capital Letter: Value Investing in Tech, Alibaba, Facebook, Google, Visa, S&P

March 8, 2017March 8, 2017 InvestorAlmanac

David Einhorn’s 4Q17 Letter – Bubble Basket, Twitter, GM, CNX, BHF, ESV, TWX

January 16, 2018January 16, 2018 InvestorAlmanac

Bill Ackman’s Investor Pres (Jan 2018): Fannie & Freddie; Herbalife Short; Nike, ADP, Mondelez; Chipotle; QSR; HHC; PAH

February 3, 2018February 3, 2018 InvestorAlmanac

Subscribe via Email

Enter your email address to subscribe and receive notifications of new posts by email.

Join 438 other subscribers

Advertisements
Advertisements
Advertisements
News Vibrant Theme: news-vibrant by CodeVibrant.
  • About
  • Contact
loading Cancel
Post was not sent - check your email addresses!
Email check failed, please try again
Sorry, your blog cannot share posts by email.