It’s time for the Q3 review of our model portfolio, a collection of 15 stocks that we selected in January as our core investments for 2021.
Following a nice recovery in Q2, the model portfolio was steadily making gains during the third quarter, but on the 22nd Sep the market started trending downwards and growth stocks were hit harder than the general market, and the model portfolio lost 15.1% in value by the end of the quarter while the S&P lost only 6.1%.
Only eight out of the 15 stocks are showing positive returns from the inception of the portfolio in Jan, with just six of those beating the S&P. However in most cases, this underperformance is not a result of the company failing to execute, and was driven by macro-economic factors impacting the value of future cash flows, which growth stocks are far more dependent on than more mature companies.
In today’s episode, we dig into some of the key stories and updates for each stock in the portfolio.
- Shopify (SHOP) has announced a deeper partnership with Roku (ROKU), launching a new app providing merchants on Shopify with a way to easily build, buy and measure streaming TV ad campaigns.
- MercadoLibre’s (MELI) stock continued to rise in Q3, up 7.8% in the quarter but is more or less flat since the start of the year. The business itself continues to go from strength to strength, as more and more SMEs rely on MercadoLibre’s services.
- Sea (SE) are raising $6.3 billion in fresh capital to fund future acquisitions plus business expansion, including into Europe – the official Shopee Poland website is already live.
- Square (SQ) has acquired Afterpay for a $29B all-stock deal and will integrate it into its existing Seller and Cash App business units, enabling even the smallest of merchants to offer ‘buy now pay later’ at checkout. This gives Afterpay consumers the ability to manage their instalment payments directly in the Cash App, and give Cash App customers the ability to discover merchants with BNPL directly within the app.
- Editas Medicine (EDIT) released data on EDIT-101, its therapy for LCA-10, a genetic disease that causes blindness. The breakthrough result that investors were hoping for was not achieved, and the stock sold off 45% since its recent high in September. However, there was some benefit seen for at least one patient in the trial, and this was a useful proof-of-concept for the technology as the clinical trial continues.
- Guardant Health’s (GH) share price suffered from unconfirmed rumours that they were planning on buying NeoGenomics (NEO), another genetic testing company. However, since the recording of the episode, this news has been disconfirmed.
- Teladoc Health (TDOC) is our model portfolio’s worst-performing stock year to date, now down 53.7% since the inception of the portfolio, however, the company continues to execute well and was recently selected as a provider of remote monitoring services in Canada covering 60% of the population.
- Intuitive Surgical (ISRG) plans to invest more than $500 million in its current campus in the state of Georgia, growing this facility to 750,000 square feet of manufacturing and engineering operations, state-of-the-art training facilities for surgeons and hospital care teams, and administrative offices, the expansion project is slated for completion by 2024.
- CrowdStrike (CRWD) entered the Nasdaq-100 Index, the Nasdaq-100 Equal Weighted Index, and the Nasdaq-100 Technology Index in August, triggering large mandatory purchases by index funds – albeit the corresponding stock price increases do not reflect fundamental changes within the company.
- Cloudflare (NET) continue to announce new products and enhancements at a high rate, including cloud storage, video streaming and email security. The company are becoming a more serious player in the cybersecurity space, and in July reported that they had stopped the largest ever reported DDoS attack.
- Twilio (TWLO) reported another great quarter but the stock is held back by their lack of profitability. This should not be a cause of concern for investors, the company are investing in growing the business, including increasing their investment in competitor Syniverse’s SPAC deal.
- Disney’s (DIS) Disney+ streaming service now has 116M subscribers in over 60 countries (vs. 209M in 190 countries for Netflix), and are projecting 300M subscribers for by 2024, providing a strong network effect for other revenue streams, including parks, merchandise, and movies.
- DocuSign (DOCU) grew revenue by more than 30% in each of the quarters for the past three years, increasing its quarterly revenue from $167 million to $511 million during the latest period. Growth has accelerated massively due to the pandemic as businesses had no choice but to use DocuSign’s products, but we do not believe DocuSign is a ‘work from home’ stock or a “COVID play”, and we anticipate the company prospering in the future as they cement their position as the contract lifecycle management leader.
- Fiverr (FVRR) has begun to offer subscriptions for over 150 categories. Instead of a one-time purchase, buyers can purchase a recurring service (e.g. content marketing) on a monthly basis. Fiverr said over 20% of subscription orders have a duration of six months, and this initiative will increase their penetration into markets currently served by competitors such as Upwork (UPWK).
- Magnite (MGNI) have announced a closer partnership with sports-first streaming service fuboTV (FUBO) for programmatic marketing of Fubo’s connected TV ad spots to ad buyers. This was a big win for Magnite’s supply-side purpose-built CTV ad tech platform, facilitating access to fuboTV’s highly sought-after CTV inventory, including 50,000 live sports events per year as well as 100+ premium sports, news, and entertainment channels.
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Luke: Hi, this is Luke.
Albert: And this is Albert.
Luke: Today is Monday the 4th of October.
Albert: Welcome to the Telescope Investing podcast.
Intro
Albert: Thanks for joining us on the Telescope Investing podcast, and if you’re joining us for the first time, it’s great to have you.
Luke: Before we get into today’s episode, we’d like to take a quick moment to thank everyone who’s been listening and supporting the show. This show’s for you, and we’d like to encourage you to drop us a line at feedback@telescopeinvesting.com and let us know if there are any topics you’d like us to cover in the future.
Albert: And one of the best ways you can show support for the podcast is to leave a review on Apple Podcasts and also subscribe on your podcast platform of choice.
Luke: The goal of Telescope Investing is to provide value to you and to empower you to make smarter investing decisions. If you’ve got a friend who you think could also get value from Telescope Investing, we would love it if you take a quick moment now to spread the word and send them a link.
Hey Alb, I’ve also been trying to spread the word on Telescope Investing by starting to join other podcasts. I did my first guest spot on the Invest Smarter podcast with David Dewitt of Dewitt Capital Management last week.
Albert: Oh yeah, you told me about this, Luke. How did it go?
Luke: Yeah, it was really good fun. David and I had a really good chat about investing frameworks, megatrends, sustainable investing, handling volatility, and I think I also reeled through some of the bad decisions I’ve made over the last 18 years. Hey listeners, if you get a moment and don’t mind listening to me umm and umm my way through a slightly rougher first interview as a guest, give some support to David and take a listen. You can find the show by just googling “invest smarter podcast”.
Albert: That’s fantastic, Luke. I’ll make sure I’ll give that a listen, and great job, Luke, for spreading the word about Telescope Investing. Well, let’s get on with today’s show.
Overview
Luke: Albert, it’s October. You know what that means? It’s Q4 of the year.
Albert: It’s the beginning of Q4, yes. Yes, Luke, there’s only three months left in the year.
Luke: And what that also means is unfortunately in terrible timing given the performance of our stocks in the last couple of weeks, actually almost the last couple of days, it’s the end of Q3 and time to do our third quarter review of the model portfolio.
Albert: And as a reminder, the model portfolio is a collection of 15 stocks, covering eight megatrends that we selected at the start of the year as our core investments for this year. And we started tracking them from the 27th of January, the day after we released the podcast finalizing the portfolio.
Luke: The closing prices we’re going to rattle through today are based on market close on Thursday, the 30th of September, which was not a great day for growth stocks. It’s not looking pretty.
Albert: And for full disclosure, we have positions in all the model portfolio stocks in both our personal portfolios in varying degrees.
Luke: So, Albert, how did we get here? Things are looking pretty good towards the end of Q2, and they were looking really good as recently as about two weeks ago.
Albert: Yeah, the portfolio was steadily recovering, and I believe by the 3rd of September, our return for the portfolio reached 20.1% versus 20.9% for the S&P.
Luke: We nearly got there. We nearly passed the S&P, but we didn’t quite. By late September, around the 22nd, the market started trending downwards and our growth stocks got hammered, much more than the rest of the market, losing 15% of their value by the end of the quarter. Whereas the S&P only lost 6%. It puts us in a very bad second place.
Albert: Yeah, that was a real kick in the teeth, and now only eight of those 15 stocks that we selected at the start of the year are showing positive returns, and only six of them are beating the S&P.
Luke: I think we can take some solace in the fact that the reason our growth stocks are in the hole are not for fundamental reasons. It’s just macroeconomics. It’s what’s happening in the wider environment and other opportunities that investors have to invest the money in things other than equities. Basically, it negatively impacts the value of future cash flows for our growth stocks and they’re heavily valued around their future cash flow potential.
Albert: And who knows how long this market correction will last. And while we’re still hopeful, I think it will be a minor miracle if the model portfolio beats the S&P by the end of the year.
Luke: Yeah, I agree. We’re not overly concerned though. We’re still positive, at least for now, and we intend to hold most, actually all, of our model portfolio stocks for many years to come.
Albert: And I have to say the S&P 500, it’s really strong it’s resilience, and while it’s more or less the same as it was at the end of Q2, 14.8%, if it holds, is a wonderful return for a year.
Luke: Yeah, it’s a great year to be an index investor, and you know what, as we always say, 99% of investors should be passive index investors. It takes time and effort to invest in individual companies, and sometimes, like this year, it hasn’t worked out compared to the market.
Albert: We selected these 15 stocks as our core investments for this year, but our personal portfolios contain other stocks and thankfully, our personal portfolios have done slightly better. I’m showing a return of 9.5% year to date..
Luke: And I’m up 10.6%, and I think you’re right, we’ve got very similar stocks. I guess it’s in different proportions like I’ve got such a chunk in Shopify. I guess that’s helped me accelerate ahead of the model portfolio. So what we’re going to do in today’s episode is do a whiz through all 15 of the stocks and just reflect on where they are and any material news in the last three months.
Shopify
Luke: And Shopify is a great place to start, especially as it’s at the top of the table when you go and look at the website. So year to date, Shopify are thrashing the S&P and from the start date, they’re up 24.1%. Albeit they took a 7% hit in Q3. And really the only news I get to see around Shopify recently was an announcement a few weeks ago that Roku are launching a new app to provide merchants on Shopify with a really easy way to launch streaming ad campaigns for the stuff that they sell in their Shopify shops. This is actually the first time a TV streaming app has integrated with Shopify. It’s quite exciting, opens up whole new channels to advertise on and lots more value for Shopify sellers, which is going to be helpful for Shopify too obviously.
Albert: Yeah, this rise of connected TV or CTV is a major shift, and the fact that Shopify have this deal with Roku is an amazing testament of how central Shopify is to e-commerce.
Luke: And it’s really interesting the way it works. It’s not like you’re having to go and make TV adverts and go and find actors. If you’re selling stuff in your Shopify store, because of the nature of programmatic advertising and the fact you can target it so accurately, you basically, as the seller, pick your audience, set up a campaign, budget, timing, and duration, upload some creative content, which doesn’t mean fancy ads with guys in big suits, could just be cool images from your website or images of the products themselves. And then you click the button to launch the campaign and Shopify and Roku take care of everything else.
MercadoLibre
Albert: Moving on from Shopify to another e-commerce giant, or at least a giant in its region, is MercadoLibre. And MercadoLibre continued to rise in Q3 and is up 7.8% in the quarter, but it’s more or less flat since the start of the year. However, the business itself continues to go from strength to strength. I saw a tweet last week that claimed a quarter of small and medium-sized businesses in Latin America got at least 50% of their revenues from MercadoLibre. And the attached article was in Portuguese, but luckily Google Translate came to the rescue, and in that article, it continued to say that half of the small and medium-sized businesses in Brazil said that without MercadoLibre, it would have been impossible to survive during the pandemic in 2020. That sounds incredible.
Luke: Very anecdotal, I had my annual medical two weeks ago, and the doctor I saw was Brazilian. And we got chatting about the fact that I’m about to retire from my job and manage my investments, and we are talking about MercadoLibre. And when I mentioned it, he said, “Oh, they’re like the Craigslist or that Gumtree company in Argentina, right?” He’d heard of it, but he definitely saw it as some tiny little niche thing, not a big e-commerce player. I guess he hasn’t been home for a couple of years, particularly because of the pandemic, but it does show how quickly MercadoLibre has accelerated and grown and become much more mature.
Albert: And that’s just its e-commerce side. They also have an e-payment platform called MercadoPago, and it reached a total payment volume of 17.5 billion US dollars, and 10.3 billion of that was outside the MercadoLibre platform, off-platform as they say. And 40% of the small and medium-sized businesses receive their first offer of credit through MercadoPago, and they said that 70% of those businesses saw their revenues increase.
Luke: And that’s pretty exciting if they’re getting into kind of corporate loans in that way and trade finance.
Albert: And another amazing fact that I saw in the article was that MercadoLibre directly or indirectly was responsible for six new jobs in that region per hour. So it appears that the threat of competition from say, Sea, was overblown and MercadoLibre is definitely the dominant player in e-commerce in Latin America. And it had an estimated 31% of the e-commerce market by GMV in 2021, and there’s projections that this will rise to 38% by 2025. They do expect slower growth as the region comes out of the pandemic, but that’s only to be expected. But with e-commerce expected to grow at 30% annually until 2024, it shows that there’s probably a lot of growth left for this company for years to come.
Luke: And, you know, there are more than 660 million people living in Latin America, double that of the US. And e-commerce is a tiny penetration, only 6% of retail in the region compared to the global average of 18%. So that’s massive growth opportunity for MercadoLibre.
Sea
Luke: But in summing that one up, Albert, you mentioned Sea, and they’re starting to step into Mercado’s territory in South America, but I found a news story that indicates they’re going elsewhere also, quite exciting. But Sea are one of the big winners in the model portfolio year to date, up nearly 55%, but despite having such healthy numbers, they’re still a non-profitable company, but the reason is they’re operating at a loss by choice. It’s a bit like the Amazon model. They’re just reinvesting into acquisitions and entering new markets and growing their territory and their total addressable market.
Albert: And when Amazon was doing this early on, I think the market didn’t really get them credit for it. Well, in this case for Sea, the market is giving them credit for it, and the stock is quite richly valued.
Luke: Well, I think that valuation is justified. As we know, they’ve already started making steps into MercadoLibre’s territory in Latin America, but I saw a news article that shows they’re actually planning to enter Europe now as well, starting from Poland in the next few months. Apparently, Shopee’s Poland official website has already gone live.
Albert: Why did they start in Poland as opposed to markets such as France and the UK?
Luke: I don’t know, maybe there aren’t good competing platforms in Poland. I’ve got a bunch of Polish colleagues. I’m going to ask them when I speak to them next.
Albert: Yeah, maybe they did that to gain market share before they tackle the incumbents in France and the UK.
Luke: Yeah, and culturally, it’s a different market and not that dissimilar to Western Europe, so a good chance to learn about what works and what doesn’t.
Square
Albert: Well, moving on from our e-commerce picks, we move to Square, one of the main e-payment platforms in the US and also in other territories. And the main story for Square in the last quarter was their purchase of Afterpay, the buy now, pay later giant from Australia.
Luke: Yeah, Afterpay’s huge, they’ve got 16 million customers and nearly a hundred thousand merchants globally. It is interesting how many of these fintech companies are getting into buy now, pay later. I think you and I are a little bit conflicted about this model, but it does seem to be the darling of the moment.
Albert: It has the potential of replacing credit cards, to be honest, and even Visa and Mastercard are getting it in on the action with their own products. But the BNPL market is becoming increasingly crowded, and I think the solution with the most reach and integration with existing payment platforms is likely to have an advantage. Therefore, I’m pretty happy holding onto my Square shares.
Luke: Oh, totally. Look, there’s nothing in the model portfolio I’m planning to exit from my own portfolio right now, but Square in particular, very bullish on that company.
Editas Medicine
Albert: We’ll test that, Luke, how about Editas Medicine? Because they had quite a bad quarter in the Q3, mostly in the last few weeks. And the reason for this is that they released data on EDIT-101, its therapy for LCA 10, a genetic disease that causes blindness. The therapy edits the genes directly inside the patient’s body to correct the genetic disorder.
They released some results last week, and unfortunately, the market didn’t take kindly to the news. So the study as a whole had 18 patients, but last week they released data on six of them. Two on a low-dose regimen and four on the mid-dose one, and only one patient in the mid-dose group showed signs that their vision was improving. They didn’t get their vision back but their vision did improve. This was not the breakthrough results that investors were hoping for, and the stock sold off 45% since its high in September. And it’s down 60% from its all-time high at the beginning of the year. However, Editas and other medical experts are more optimistic because they’ve found that the treatment was relatively safe with no serious adverse effects, and this paves the way to test higher dosages and also to include children in the study.
Luke: Yeah, this is not terrible news for Editas. Okay, sure, they didn’t have a crazy breakthrough result where suddenly everybody in the study regaining their vision, but nobody was harmed and at least one person has had some minor improvement. So, I guess that’s like a proof of concept and definitely reason to scale up and continue testing.
Albert: Yeah, and Lisa Michaels, the chief medical officer at Editas, she said, “These encouraging results provide a proof of concept on our in vivo gene-editing platform and increase Editas’ confidence in the broad potential of our gene-editing technology to address additional serious diseases.” So they’re planning to use this for other conditions. We have to realize that this is very early data, and I think it’s kind of amazing that it works at all because even a small improvement envision can be really meaningful for the patients. And the whole trial is expected to finish in March 2024, so that’s quite a way off.
Luke: I guess it’s a good reminder of how volatile early-stage biotechs can be. Clinical trials take a long time, and sometimes the results and the journey can be quite rocky.
Albert: And at the moment, I have a 1% position in Editas, and while I’m not selling, I don’t feel like adding any more at this time. The news hasn’t been positive enough, and I think I will treat Editas more as a hyper-growth stock than a core holding. And I guess in practical terms, this means I won’t be tracking it as closely and building a larger position over time, but we’ll leave it as a relatively small position.
Luke: I buy that, I agree. I’ve also got about a 1% position and I feel slightly reassured, I guess. I bought in a long time ago so my position’s up like 60%, albeit it’s taken a battering lately, but I think that’s actually the right answer. Let’s start to think of it alongside our other hyper-growth picks. For me, actually, this is one I’ll keep in my portfolio, but maybe it doesn’t make the cut for next year’s model portfolio, something we’ll have to look at as we get closer to year-end.
Guardant Health
Luke: But let’s go take a look at another biotech, Guardant Health, also, unfortunately in the hole. They started the year looking pretty rosy, but where they are at the end of Q3 is down 15.2%, so significantly underperforming the index.
Albert: Well, that’s where they were at the end of the day on the 30th of September, but unfortunately, it’s done even worse in the one trading day since the end of the quarter. On Friday, there were unconfirmed rumors that Guardant Health was planning on buying NeoGenomics, another genetic testing company. Now, you have to realize that Guardant Health is an $11 billion company and NeoGenomics was worth $6 billion. So investors are concerned that Guardant Health will need to borrow cash or dilute shares significantly to fund that buyout, and the stock sold off almost 14% on the day, and our return is now down to minus 27%.
Luke: It does seem like quite a drastic overreaction. And I don’t know anything about NeoGenomics and what they do, but if you think about Guardant’s business model, they take blood and then they do a battery of tests, and they were screening for different cancers. If they’re able to use that same blood sample and use NeoGenomics’ technologies to test for an even wider range of diseases, well, that’s huge value at limited extra costs operationally. This sounds like, at least in principle, a good acquisition.
Albert: Yeah, I think investors are concerned about the relative sizes of the companies. Guardant, it’s not a small company, but it’s not that big either, and they’re buying a company just slightly smaller than they are.
Teladoc Health
Albert: Moving on from Guardant Health to Teladoc Health, our worst-performing stock at the end of Q2, and I’m sad to say that it’s still our worst-performing stock, dropping a further 23% since then, and it’s now down 53.7%. This is a real test in conviction, Luke.
Luke: This is a test in conviction and this one hurts me particularly because it’s the one stock I bought for all of my cousins’ kids for their Christmas present. Now they think their uncle Luke is a fool.
Albert: And that’s lowercase F, right?
Luke: Absolutely.
Albert: Well, it has been some news around Teladoc in the last quarter. Teladoc launched its telehealth service in Canada in 2019, but last week, they announced that they can now provide remote patient monitoring there as well, covering 60% of the population. Whether or not this provides a significant increase in revenue will have to be seen.
Luke: Yeah, I think the thing that’s hanging over Teledoc’s valuation is that Livongo acquisition last year. They bought Livongo for $18 billion and today the combined company is only worth $20 billion. Maybe they overpaid for Livongo. Like, the long-term trajectory makes sense, combining Livongo and Teladoc’s capabilities. The combined solution is valuable for patients and patient outcomes, but maybe we just got to wait a few years for this to play out fully.
Albert: Yeah, it’s definitely been in a tough year for Teladoc shareholders, and it’s okay to make mistakes and cut your losses, but I think it’s too early to call time on Teladoc just yet. And I plan to hold, but I will be keeping a close ear on their earnings calls.
Luke: This is one of those stocks that are younger Luke may have doubled down and doubled down on chasing my losses. I think I’ve learned that lesson now. Chase your winners, not your losers, but like you, I’ll not be selling. I’ll just be sitting tight on this. I think we have to ask ourselves tough questions though when it comes to formulating the 2022 model portfolio.
Intuitive Surgical
Albert: And moving on to Intuitive Surgical, a stock that we did a deep dive on a few weeks ago.
Luke: Yeah, at least out of all the med-tech and health-tech companies. Intuitive are doing pretty well. They’re ahead of the market and from our start date in January, they’re up 31%. As you say, we did a great deep dive of Intuitive with Adu Subramanian. He gave some really great insights on the company. I’ve not seen any real news over the last quarter. A small story is that they’re planning to invest half a billion dollars in their campus in Georgia. They’re going to grow that campus to more than 750,000 square feet of manufacturing and engineering operations, creating state-of-the-art training facilities for surgeons and hospital care teams. So that shows that they reinvesting in themselves building out the capability and trying to train that next generation of surgeons to use their platform.
CrowdStrike
Albert: And moving on to our digital transformation stocks, we start with CrowdStrike, the cybersecurity company, and that’s doing pretty well. It’s more or less at the same point as it was at the end of Q2, and it’s currently showing a positive return of 22.3%.
Luke (2): Some good news for CrowdStrike in the last quarter. They entered the NASDAQ 100, which is actually quite a significant event for a company when they enter a new index. The real reason is it triggers mandatory purchases by the related index funds, and in this case, this includes funds like the popular Invesco QQQ Trust, an exchange-traded fund with close to $175 billion in assets. That forced quite a bit of buying on the day they entered the index.
Albert: But those price changes could be temporary because it’s a big deal when a stock enters or leaves an index for those exact reasons, Luke. But over the long-term, I don’t think this is the reason to invest or not invest. It might be a reason for trading in a certain way, but for long-term investment, you should look at the business and not whether it’s an index or not.
Luke: Yes, totally agree.
Cloudflare
Albert: And then we’re going on to Cloudflare. This is one of our biggest winners and what we said at the end of Q2 was “while it’s good to see one is your stocks increase in price, it’s not so good to see its valuation get extended. Cloudflare now trades at 67 times sales, up from 53 times just two months ago. That’s pretty high and Cloudflare will most likely need to execute perfectly to maintain that valuation, so I expect some volatility going forward.”
Well, it seems that Cloudflare has executed perfectly and it’s just getting the job done. And at one point during the quarter, it had an evaluation at nearly 77 times sales. It’s dropped back down to 66 times now, but the stock is still up 6.4% since the end of Q2.
Luke: You know, they’re also investing hard in themselves, developing new products and enhancements. And one thing I note is they’re starting to appear much more significantly in the cybersecurity space. I saw a news article that back in July, their systems managed to stop the largest reported distributed denial of service attack, which has apparently 17.2 million requests per second, three times larger than any one that’s previously been recorded.
Albert: Yeah, and they’re also releasing new products that allow them to enter new markets and increase their total addressable market. They released a new cloud storage solution that will compete directly against AWS S3 cloud storage, and also video streaming, and they’re going to try to improve email security.
Luke: It’s good, they just seem to be executing nicely, growing steadily. As you say, one of the best performers for us this year, but this is a journey I’m happy to stick with for many years to come.
Twilio
Luke: Let’s talk about a similar SaaS company, Twilio. Unfortunately, the numbers aren’t looking so good. They’re down 5.5% year to date. If you dig into their latest results, they’re pretty good. Most of their important metrics are up perhaps apart from operating and profit margins, which have been about minus 30% for the last couple of years. Twilio are obviously investing in growing the business. And actually, one thing is interesting, they’re increasing their investment in competitor, Syniverse, getting in harder on the SPAC deal that’s happening right now.
If we just stand back from what Twilio are doing, they’re the category leader in this space. Honestly, I think we expect them to be profitable within a couple of years. The business is strong. They’ve got great leaders. I’m happy to stay on this journey.
Albert: Yeah, we discussed Twilio with industry expert, Paul Ruppert, in an episode, and I was really encouraged about what I had. And I did some more research and I took this opportunity to add to my position in Twilio this quarter.
Luke: Very good. I didn’t realize you’d done that, good conviction.
Walt Disney
Albert: And now moving on to another stock that most people will know, Walt Disney. And the main news with Disney in the last quarter appeared to be their spat with Scarlett Johansson judging by the number of tweets that appeared on my timeline. Thankfully, that disagreement has been resolved, but one aspect of that story that is central to the company’s future is Disney+. The company’s fortune and share price is largely dependent on the success of its streaming platforms. Maybe I’m being a bit too optimistic, but I really can’t see them failing here given the IP that they have.
Luke: They’ve grown at a crazy rate, out accelerating all of their competitors. To date, they now have 116 million subscribers in over 60 countries. I’m one of those 116 million. It’s a great product.
Albert: And they also own Hulu and ESPN+, and all three streaming services combined have 174 million subscribers.
Luke: They’re accessing international markets. They’ve rolled out into Latin America last November, albeit, it’s been a bit of slow progress and they’ve also now rolled out into India. They’re projecting slower subscriber growth in the final quarter of this year, and maybe that’s the reason for a slight pullback in the stock. Year to date for us, they’re up 3.8%, but that’s down a little bit from where they were at the end of Q2.
Albert: And they’re still projecting 300 million subscribers for Disney+ by 2024. But apart from Disney+, they also have many theme parks, as you know, and their theme parks are continuing to open up. I don’t know if you know this, Luke, but Disney World is celebrating its 50th anniversary this year, and apparently, it will be an 18-month celebration.
Luke: Maybe a good time to go out, especially as I hear the new Star Wars-themed hotel is opening soon.
Albert: But have you seen the price of that] hotel, Luke? I know it’s modeled after a galactic star cruiser, but a two-night stay, which includes flight training, whatever that is, is expected to cost $4,800 for two guests.
Luke: Jeez!
Albert: And I read that you can book it on the 28th of October, but I can’t say I’m that keen given that price.
Luke: Maybe you need to get an R2 unit and infiltrate for free.
Albert: Well, one thing I am keen on, Luke, is that I can’t wait that Disney+ to launch here in Hong Kong in November. And I’ve heard from several friends, especially those with kids, that it’s a day one purchase.
Luke: It’s a good product at a really competitive price. I’ve actually heard that they’re deliberately operating Disney+ at a loss. It’s just part of the network effect across all their categories of revenue. It generates merchandising sales, interest in the parks, interest in the movie. It’s a great part of the massive suite of products that makes up the Disney empire.
Albert: Well, that makes sense, right? When people subscribe and see the value they’re getting from the service, small price increases over the years will probably not be a factor. And this is what Netflix has done, they’ve slowly increased price as more and more shows become available and people realize actually I’m getting quite a lot of value from this.
DocuSign
Luke: Well, let’s talk a bit about another model portfolio stock, DocuSign. We’re nearly at the end of the list now, and it’s good at least to have a winner here, up 14.3% year to date, albeit again, they took her 8% battering in Q3. They reported strong Q2 earnings again, but I think the recent drop in valuation is because the world is starting to reopen. I think the market sees DocuSign as being a Covid play, a work-from-home stock, but that’s not the case. They’ve got a market share of 70% of the whole e-signature market compared to their next competitor, Adobe, who only have 20%. But that e-signature is just like a land-and-expand. It’s to help them to sell their much deeper product set that generates far more revenue and value for customers. They’re definitely becoming the leader in contract lifecycle management.
Albert: Yeah, I agree, Luke. I don’t think this is a Covid play at all. It’s more of a work-from-anywhere play and just because the world is opening up, you’re not going to switch back to wet signatures after using e-signatures are you?
Luke: Absolutely. I think I’ve got too much exposure to DocuSign in my personal portfolio to add to it, but I’m very bullish about the business.
Fiverr
Albert: Moving on from DocuSign to another work-from-anywhere stock, Fiverr, the freelancer platform, and this came as a bit of a shock actually, Fiverr’s share price was doing quite well in Q2, but on the 5th of August, the price dropped 25% in one day, and it hasn’t recovered since then.
Luke: Yeah, a bit like my comments of DocuSign, it does seem as though our Fiverr have been impacted by Covid reopening, but if you look at what’s happening within the business, it’s all pretty healthy. Their high-value buyers, those spending over $500 a year, are growing quarter over quarter and now make up 61% of core marketplace revenues, up from 59% at the start of this year.
But also, they now offer a subscription model for over 150 categories that they sell on the platform. Instead of a one-time purchase, buyers can purchase a reoccurring service, maybe podcast editing on a monthly basis. Fiverr said that over 20% of subscription orders have a duration of six months. I think this is quite exciting, turning Fiverr into more like an Upwork type platform where you’re building a sustainable relationship and recurring revenues between buyers and sellers.
Albert: Yeah, sounds like there’s not much difference now between Fiverr and Upwork. To be honest, I’m a bit more cautious about this one. Not because of the world opening up from Covid, but because after a year and a half of people working from home, people have realized that working in the office, it actually has more appeal and they first thought, and I think people would like to work in offices with other people.
Luke: While I’m sat on the podcast today, wearing a shirt and trousers and about to head into the office for the afternoon. And although it’s novel at the moment after years of being from home, I think that novelty factor is going to wear off pretty soon. I’m personally going to enjoy not working again, but those who are still working, I think are going to enjoy the flexibility offered by more like a gig economy style job, where they’re in control of where and when they work.
Albert: Also, part of this is not driven by the individual, but also by the companies. Maybe they want to have more flexible working conditions with their staff.
Magnite
Luke: Well, should we pick up the last stock? Unfortunately, another loser in the model portfolio, Magnite, and this is with a bit of a heavy heart because this is the biggest dollar amount I’ve lost in my personal portfolio, backing and then doubling down on Magnite. As of close of Q3, they were down 24% from our start date.
One small piece of good news I did spot in the last couple of months. They’ve recently announced a partnership with fuboTV. I’m seeing fuboTV all over Twitter. I don’t know much about it, but evidently, it’s a sports network being built for connected TV, and fuboTV have an inventory of over 50,000 live sports events per year, as well as over a hundred premium sports news and entertainment channels. And so Magnite partnering with them opens up another massive opportunity for doing programmatic advertising to those sports fans.
Albert: And I believe a big part of the bull case for fuboTV is that they will integrate gambling onto their platform, so you can watch the sports on TV and also gamble through their platform.
Luke: Well, it’s interesting. I guess gambling is a huge market for online advertising, right? They must spend a ton.
Albert: So Magnite is a play on the supply side of programmatic advertising. Connected TV is expected to be a huge driver of this over the next few years. I think they’re in a good position, but the market just hasn’t caught it with that vision yet
Luke: Yeah, I like this. I said I wouldn’t double down on my losers. Magnite might be a stock that I do put a little bit more capital into. Well, that’s it for the 15 stocks in a model portfolio, I think. Bit of a mixed bag, but mostly fairly ugly. And although we’re ahead this year, we’re underperforming against the S&P.
Hypergrowth stocks
Albert: But Luke, do you want to do a quick recap of our hyper-growth stocks?
Luke: Yeah, let’s do that, and although we’re talking potentially about adding Editas to that list, officially, there are only four stocks in the hypergrowth portfolio today. I don’t think we’ve got the time to dive into them all, but just to whip through their valuations, the two big losers are CuriosityStream and Nanox Imaging. CuriosityStream down over 25%., Nanox more than 40%. And our two winners are Integral Ad Science, up nearly 20%, and Matterport, up nearly 14%. So definitely the losers are outweighing the winners there.
Albert: It should be said that these stocks can be very volatile, so you do expect large swings in short periods of time.
Luke: And, you know, we’ll keep adding to our hypergrowth picks over the years. This is a really long-range portfolio where we buy quite small prospective positions for less than 1% of our own portfolios, and we don’t really keep track of them. So we just buy them, forget them, come back in 10 years and see where they’re at.
Key takeaways
Albert: So I’ll move on to key takeaways, Luke, what do you make of our model portfolio as it stands at the end of Q3?
Luke: So it hasn’t been a great year for growth stocks, but I’ve got to say, actually, I’m pretty happy. I think we’re holding some very high-quality companies, and it’s more macroeconomic factors that are beating them down rather than failures to perform or failures in their fundamentals. Sure, growth stocks are expensive compared to say, dividend payers or much larger established companies, but the reason for that is their potential over the five or 10-year timeframe. And I know we pitched the model portfolio as a portfolio that we expected to beat the market in its year of inception, we’re not going to manage to do that every year, but as long as the long-term gains keep mounting up, I think it’s the right path to follow.
Albert: Yeah, we’re lagging the market by quite a wide margin now, and there’s only three months left in the year, so as we said earlier, it’s going to take a minor miracle for us to catch up, but you never know, growth stocks do tend to rise more quickly than the general market in bull markets.
Luke: And let’s not forget, we started our model portfolio last year, only getting kind of six months in from the launch of Telescope Investing, and those six months returned 41%. So even if we only return say 10% this year, that’s going to lift that number to 45%. That’s not bad for 18 months return.
Albert: I’m going to let the model portfolio play out for the final three months, but in that time, we’re going to start thinking about the stocks for the next year’s model portfolio. And we’ll be starting this process from scratch, going through the megatrends and picking out the stocks that best reflect those megatrends.
Luke: I remember we had to drop a couple of megatrends because we just couldn’t find good investments, particularly around plant-based meat and climate change stocks. I’m really hoping we can find some good opportunities in those sectors. They are areas I’d like to invest in harder myself.
Albert: But given the long-term approach that we take to investing, many of the stocks in next year’s portfolio are likely to be in this year’s one as well.
Luke: Yeah, exactly. We’re not buying and selling, we’re generally buying stuff and holding it for the long-term. They’d have to be a good reason for us dropping something out of the model portfolio.
Quote
Albert: So Luke, do you have a quote to round us off?
Luke: I do, and it’s quite relevant to our situation today. Arianna Huffington famously said, “Failure is not the opposite of success, it’s part of success.”
I don’t think we failed with the model portfolio this year. Sure, we’ve underperformed, but this is all part of the learning journey.
Albert: Absolutely.
Luke: Well, Alb, before we close, I think we should also reflect on the fact that someone else hasn’t failed, we hope. You’ve just graduated your nutrition degree, right?
Albert: Well, Luke, I haven’t graduated. I finished the course, and I have to wait for my results before I can say I’ve graduated, but yes, thank you
Luke: So you’ve got a new BSc to your name and when you criticize me and your other friends about our eating and drinking habits, now you can do it from an accredited position.
Albert: I don’t do that, Luke!
Luke: I see that side-eye you give to my steaks!
Wrap
Albert: Well, that’s all for this week. Thanks for listening.
Luke: If there’s a future topic you’d like us to cover, you can message us on Twitter. I’m @LukeTelescope.
Albert: And I’m @AlbertTelescope, or you can email us at feedback@telescopeinvesting.com.
Luke: If you enjoyed today’s episode, you can find more content at our website, telescopeinvesting.com, where you can leave us a comment or a review.
Albert: And if this is your first time tuning in, perhaps consider subscribing to the website so that you’re the first to hear about new articles and episodes as they drop.
Luke: Thanks, Albert.
Albert: Thanks, Luke.
