Sohn Hearts and Minds: AFR Fund Manager Coverage

Sohn: Builders Union’s Markus Bihler picks British fintech Wise
Author: Alex Gluyas

Builders Union’s Markus Bihler has picked the freshly listed London-based fintech Wise as his top pick at the 2021 Sohn Hearts & Minds Conference.

Bihler believes Wise, which listed on the London Stock Exchange in July, offers a superior product to most local banks when transferring money across borders.

“If you compare Wise’s solution to traditional banks, we’re talking about superiority in terms of customer experience across a number of factors, be that price, be that speed, be that convenience or be that transparency,” he says.

Builders Union believes Wise is poised to capture the tailwind of the growing expenditure of young consumers. It expects this demographic will experience 20 per cent growth in its income and expenditure over the next 10 years.

“We’re asserting that the structural shift in consumer behaviour benefits the potential top line of a company like Wise given the 20 per cent structural long-term growth in young consumer spend, but also by the nature of the changing behaviour, shifting wallet shares towards companies like Wise,” Bihler says.

Wise’s net promoter score (NPS) of 76 illustrates the quality of its offering, Bihler says. This compares with an NPS of 18 for traditional banks, and even tops Afterpay’s score of 55 and Apple’s of 68.

“I think the picture here is that customer adoption for Wise, with regards to customer feedback, is more in line with the Apples and Amazons, than with your traditional financial services and banking sector,” Bihler says.

Wise’s high profitability is fuelled by 65 per cent gross margins, or 25 per cent EBITDA margins across the business, which drives attractive free cash flow generation of 20¢ and above, per dollar of revenue. This combines to create an estimated 30 per cent top-line compound annual growth rate over the next three years.

Builders Union expects Wise’s share price will climb to about £30 by 2027, which gives a 27 per cent five-year annualised return.

Bihler warns of three risks Wise could face. The first is the pace of fee compression in the industry and the company; the second is the management’s ability to execute an “arguably ambitious” growth plan; and the third is the development of cryptocurrencies.


Sohn: Pinnacle a unique investment, says David Allingham
Author: Tom Richardson

Nick Griffin kicked off his presentation with a slide of superhero Tony Stark, making the point that it is, in fact, the glowing circular arc reactor at the front of his suit that is the “hidden hero” powering the superhero.

As the world races to decarbonise – a move that will take 50 years and cost between $US30 trillion ($42.3 trillion) and $US50 trillion – Griffin says the arc reactors powering that shift will be semiconductors.

And that’s led the fund to Nasdaq-listed $US26 billion Onsemi, which specialises in power semis (“the muscle of semiconductor markets”) and sensor semis (“the touch”).

Griffin says these semiconductors will power most of the major shifts: from internal combustion engines to electric and autonomous vehicles through to the transition from fossil fuels to renewable energy as well as more efficient recycling and sorting techniques for waste disposal.

Each of these will require an increase in semiconductors. An autonomous electric vehicle will require $US1600 worth of semiconductors, compared to just $US375 in internal combustion engines.

And Griffin expects the car market will be 50 per cent electric by 2030. He likes Onsemi in particular because of its management, and the fact it is being priced as an industrial semiconductor producer.

He believes it is a “structural grower”. Priced at about 20 times earnings, Griffin expects it to re-rate to at least 30 times. Coupled with better revenues and earnings, the fund is tipping more than 150 per cent upside in the next three years.

 

Sohn: Aravt Global’s Liow picks GitLab for sharp growth
Author: Richard Henderson

Yen Liow, founder and portfolio manager of Aravt Global, has a bullish take on Nasdaq-listed software development company GitLab, which he expects to soar in the coming years.

Liow, who hails from Melbourne and runs his New York hedge fund from midtown Manhattan, says GitLab is in a duopoly with Microsoft’s GitHub for the fast-growing “dev-ops” industry within software development.

“Dev-ops is highly complex. There is no single platform that allows developers to go through this entire process without using different sources of software,” he says.

“We believe GitLab is uniquely positioned to solve that problem. They’re investing aggressively throughout the entire dev-ops cycle.”

To increase the share price tenfold, the business will have to expand revenues from $US230 million to $US10 billion, which Liow says is possible if the company expands its user base and increases pricing.

He likens the stock pick to investing in Atlassian early in its development two decades ago and says GitLab will also benefit from a re-rating of its multiple, which trades at 23 times forecast 2023 earnings.

“We believe the dev-ops market is one of the best markets within software. Atlassian has created a $US100 billion business focused on one core part of the dev-ops stack – the plan phase,” he says.

“GitLab focuses on all parts with leadership in two and is highly competitive in a third.”

 

Sohn: Atreides’s Baker picks ‘user-friendly’ Coinbase
Author: Cecile Lefort

Atreides Management’s Gavin Baker has picked cryptocurrency exchange Coinbase Global at the Sohn conference, believing in its growth opportunities as more people embrace the crypto world.

What’s he most excited about? Coinbase creating Coinbase Cloud, the Amazon Web Services of crypto.

“Cloud is the infrastructure and tooling layer for web 3.0 application development on different blockchains and these applications are going to be very disruptive to the world of technology over the next 20 to 30 years,” Baker says from Boston where his private investment fund is based.

He expects significantly more disruption driven by the crypto world than in the past 10 years, which relied on a “stable” technology environment dominated by AI cloud and SaaS. He believes Coinbase will fuel the coming explosive disruption.

Another attractive feature in Coinbase is its potential ability to simplify “blockchain rewards via staking”, a sector that is worth $300 million and growing more than 200 per cent sequentially.

Baker believes bitcoin will eventually be the only coin using a proof-of-stake protocol. He says the process is easy for a “20 to 25-year-old cryptocurrency native”, but it is very hard for the hundreds of millions of people he believes will eventually participate in the crypto ecosystem.

Baker says Coinbase can make the process easy by splitting the rewards with the user and he expects this revenue stream to grow significantly next year.

A lack of competition in the United States, where big tech companies such as Amazon, Google or Facebook, and financial services businesses, fear regulation, should also give a hand to Coinbase, Baker says.

Coinbase made its trading debut in April this year at $US381 a share.

 

Sohn: Beauty Health attractively priced for growth, says FACT Capital’s Meng
Author: Jonathan Shapiro

If we’ve learnt anything over the past year and a half of Zoom calls and Instagram posts, it’s that we want to look good on camera.

“You might be wearing sweatpants, but you want your skin to glow,” New York-based FACT Capital’s Joyce Meng told Sohn Hearts & Minds attendees as she pitched Nasdaq-listed Beauty Health.

The company trades under the ticker SKIN and its core asset is a skin treatment product called Hydrafacial.

The treatment is gaining popularity among aestheticians in beauty spas and gaining traction thanks to positive feedback on social media.

“The treatment is a four-step cleanse, extract, hydrate and boost process that takes about 30 to 45 minutes and costs about $200,” Meng says.

The popularity is part of the attraction, but Meng is attracted to what she calls the razor/razor blade model, a reference to Gillette’s profitable business of selling blades that in turn generates repeatable sales of blades.

“Both the proverbial razor (ie the system device) and the razor blades (the consumables) are highly profitable. The sale of systems accounts for 52 per cent of revenues at a 70 per cent gross margin while the remaining 48 per cent are in consumables with 80 per cent gross margins.

“While the institution charges $200 per treatment on average to the patient, Hydrafacial recognises $25 to $30 in consumable revenue, or even $50-plus if special boosters are used.”

Hydrafacial sales were growing at 52 per cent compounded annual growth rate before COVID-19, and about 40 per cent if the lockdown periods are included.

“We think that the strong organic revenue growth continues, especially as the company aggressively reinvests in growth and takes advantage of secular wallet share allocation to skincare services,” says Meng. “We see a very large addressable market and the ability of Hydrafacial to tap into the retail opportunity.”

SKIN is not cheap, at 38 times normalised profits, but Meng says it is attractive relative to its growth. SKIN is also not without risks. One is a resurgence of COVID-19. The devices are used in treatment spas so require people to be out and about. There have also been some unexpected management changes with the recent departure of Clint Carnell.

“We think that this change mostly reflects the company entering into a new phase of scaling with Clint remaining an active shareholder as he considers more entrepreneurial early phase opportunities,” says Meng.


Sohn: Griffin picks semiconductor business Onsemi
Author: Jemima Whyte

Nick Griffin kicked off his presentation with a slide of superhero Tony Stark, making the point that it is, in fact, the glowing circular arc reactor at the front of his suit that is the “hidden hero” powering the superhero.‍

As the world races to decarbonise – a move that will take 50 years and cost between $US30 trillion ($42.3 trillion) and $US50 trillion – Griffin says the arc reactors powering that shift will be semiconductors.

And that’s led the fund to Nasdaq-listed $US26 billion Onsemi, which specialises in power semis (“the muscle of semiconductor markets”) and sensor semis (“the touch”).

Griffin says these semiconductors will power most of the major shifts: from internal combustion engines to electric and autonomous vehicles through to the transition from fossil fuels to renewable energy as well as more efficient recycling and sorting techniques for waste disposal.

Each of these will require an increase in semiconductors. An autonomous electric vehicle will require $US1600 worth of semiconductors, compared to just $US375 in internal combustion engines.

And Griffin expects the car market will be 50 per cent electric by 2030. He likes Onsemi in particular because of its management, and the fact it is being priced as an industrial semiconductor producer.

He believes it is a “structural grower”. Priced at about 20 times earnings, Griffin expects it to re-rate to at least 30 times. Coupled with better revenues and earnings, the fund is tipping more than 150 per cent upside in the next three years.

 

Sohn: Regal’s Phil King takes on retail army with Flight Centre short pick
Author: Jonathan Shapiro

Regal’s Phil King says he’s the only Australian hedge fund manager brave enough or silly enough to return to Sohn Hearts & Minds to pitch a short stock during one of the biggest bull markets of all time.

But he’s gone after a retail favourite, and reopening winner.

“There’s a saying in finance that it’s often better to travel than to arrive,” King said. That is why he’s picked retail favourite Flight Centre as a short.

The stock has surged in anticipation of the economy reopening, but King says the share price travelled to a good place long before the business got there. He doubts Flight Centre will ever return to its pre-COVID-19 glories.

King outlined five reasons why he’s shorting Flight Centre.

  1. The share price has run too far on sentiment. He compared it to Zoom, which has become a part of our everyday life but is down 60 per cent from its October 2020 peak.

  2. Flight Centre has financial challenges. The company lost more than $1 billion last year, has drawn down on debt and issued two convertible bond issues. Convertible bonds, he says, “are great for investors as they give you the upside without the downside”. In the case of Flight Centre, it means future dilution for existing shareholders if things go well – or a large refinancing task if they don’t.

  3. Flight Centre has slashed its store footprint, which will make it tougher to improve the sales to previous levels implied by its share price.

  4. There’s more pressure on one of Flight Centre’s key sources of profits: the kickbacks from airlines.

  5. The bricks-and-mortar business was already under pressure from digital competitors before COVID-19, which if anything has accelerated the shift to online commerce.

“It’s been a tough two years [and] we all need a holiday. Some of us might even use Flight Centre to book it,” King said as he signed off. “But I think the shares are a great short.”


Sohn: Cota Capital’s Babak Poushanchi picks tax software player
Author: Tom Richardson

Fresh from picking last year’s 180 per cent gainer Nasdaq-listed Bill.com and other big winners such as DocuSign three years ago, Babak Poushanchi is back at Sohn in 2021 with another stock pick. This year the Cota Capital founder and tech-focused investor has named Seattle-based tax software business Avalara as his top pick.

“It has been growing its revenues at the rate of 30 to 40 per cent over the past decade and has over 70,000 customers,” said Mr Poushanchi. “The company continues to have a big opportunity ahead of it, with less than 5 per cent market share. The business model is very predictable with over 90 per cent of its revenues as recurring and offers tremendous operating leverage with its 75 per cent gross margin.

Mr Poushanchi said Avalara could grow from a $US700 million ($987 million) revenue business today to a multibillion-dollar revenue business over the next four to five years and argued the shares are a compelling opportunity. He also said Avalara has a dominant market position and the most scalable modern platform among competitor offerings.

“The company is led by its visionary founder and CEO, who’s supported by a strong team that has a track record of success and consistent execution,” Mr Poushanchi said. “We believe that Avalara can successfully grow its business over the next few years and believe that the shares offer a compelling investment opportunity.”

 

Sohn: TDM Growth Partners’ Corlett doubles down on Spotify
Author: Richard Henderson

Spotify’s market-leading position in the future of audio will catapult the business to among the so-called FAANG stocks alongside the likes of Apple and Amazon, powering revenue growth and its share price, according to Hamish Corlett, co-founder of TDM Growth Partners.

The Sohn pitch is a do-over of Corlett’s 2019 pick for a business he said has become even more attractive given its pole position in the audio market and an attractive valuation that sits at just half of Netflix.

“We’ve chosen to double down on this idea,” he said, driven by “our belief that Spotify will become one of the leading internet businesses of our generation”.

When the likes of Meta, Amazon, Apple, Netflix or Alphabet reached $US50 billion in market value, consensus forecasts always lagged the eventual performance over the next five years. Corlett said that dynamic was happening now with Spotify.

“The key insight is that the market can still underestimate the duration of growth and margin expansion in these situations,” he said.

“We believe that Spotify has all of these characteristics and, similar to the FAANG companies at the same point of time, the market is forecasting decelerating revenue growth for Spotify and next to no gross margin expansion.”

Corlett pointed to Spotify’s concentrated position in the audio market, which has included a big push into podcasting and the formation of an open platform that will tighten links with creators and listeners.

“This is a dynamic we think will contribute to the consolidation of Spotify’s audio opportunity to a winner-takes-most market,” he said. “Spotify is investing in the future of audio and we think they’re just getting started.”

 

Sohn: Beeneet Kothari of Tekne Capital Management picks Delivery Hero
Author: Jemima Whyte

It’s an “age of instant gratification”, according to Tekne Capital Management’s Beeneet Kothari, and he is picking restaurant delivery group Delivery Hero to ride the innovation in last-mile logistics in the $US1 trillion takeaway food sector.

In a space where scale matters, Delivery Hero has already made big inroads. It operates in more than 50 countries – where it is No. 1 in 95 per cent of its markets, and four times larger than the second-largest player in 75 per cent of its markets.

It delivers 260 million orders a month, and this year is expected to grow 65 per cent after growing more than 70 per cent the previous year after being boosted by COVID-19 lockdowns.

Delivery Hero is also founder-led by Niklas Ostberg. So, what’s the opportunity? Delivery Hero is trading at a valuation discount to its peers including DoorDash and China delivery service Meituan.

Kothari says that’s because the company is still in the final stages of a four-year investment plan, after changing its model some four years ago. “Other companies have gone through a similar transition but very few in the public markets. The ones that come to mind are some of the greatest companies of all time. For example, Netflix did a business transition from licence content to own content.”

Four years ago, Delivery Hero moved from third-party players to becoming first party logistics players. It’s been successful, Kothari says, because volumes have gone up 10-fold, and the underlying profitability of the business is improving. But losses have been large.

“The underlying driver of the discount is the losses that Delivery Hero has accrued and we believe we are at the end of the investment cycle and [the] business will generate profit next year,” he says.

How confident is he? Kothari thinks the stock is likely to at least double from here, or potentially triple because of the valuation discount to its peers.

 

Sohn: Megaport ‘the most exciting tech adventure of this decade’
Author: Alex Gluyas

​​Firetrail’s Eleanor Swanson believes Megaport is currently one of the best stories on the sharemarket, and has the potential to join the ranks of Australian-founded technology companies such as Atlassian and Afterpay.

Unveiling the Bevan Slattery-backed company as her top pick at the 2021 Sohn Hearts & Minds Conference, Swanson says Megaport is solving the connection issues that have plagued businesses around the world, and by doing so, has brought the telco industry into the 21st century.

“Between the years 2000 and 2013, global internet traffic jumped 600-fold. The staggering increase in data traffic caused the customer experience on telco networks to plummet from average to abysmal,” Swanson says.

“The Megaport network is fast, flexible, and a fraction of the cost of traditional telco networks. The Megaport network is the best network, as connections go live in minutes, not months, it’s a pay-as-you-go model, and you can scale up or down as you need.”

The loyalty of Megaport’s customer base adds to the company’s appeal, with Firetrail expecting customer spend to grow at 30 per cent a year.

Megaport’s ability to innovate has enabled it to double the size of its addressable market from $7 billion to $14 billion over the past 12 months. The company operates in more than 700 locations, while its closest competitor is limited to 200.

Megaport has also created what Swanson describes as a “sales force army”, having expanded its sales reps from just 40 at the start of this year to 40,000.

“[Megaport] is now on the precipice of greatness, and has the potential to grow into one of the largest telecommunication companies globally,” Swanson says.

While the stock is currently around $20, Swanson says it can double to more than $40 a share at a market capitalisation of more than $6 billion by the end of 2022.

 

Sohn: Jay Kahn picks Bengo4
Author: Jemima Whyte

Jay Kahn’s Flight Deck fund seeks out stocks in “roads least travelled”, and Kahn reckons it has unearthed a “multi-bagger”: Bengo4, which he describes as Japan’s DocuSign.

Until COVID-19 hit, Japan’s banking and government documents needed a traditional hanko stamp, and electronic signatures weren’t used.

In April, the government relaxed regulations and Kahn sees an opportunity. It’s still very early days. Kahn estimates the total addressable market [TAM] could be $US3.2 billion ($4.5 billion) if every company used electronic signatures. Now, it’s probably closer to $US90 million. Based on penetration rates and GDP comparisons between Japan and the US, that number could grow to between $US536 million and $US698 million. That’s five to six times growth.

“We think we are very much in the early stages of a J-curve penetration in terms of the rapid adoption of e-signature in Japan over time,” he says.

Bengo4’s business is called CloudSign, and the company also has an ex-growth, highly cash generative legacy business which connects lawyers with consumers who need advice. Kahn says that legacy business limits the downside.

But the real excitment is CloudSign, which has more than 40 per cent of the nascent market with 9800 companies.

“It is winner takes most,” he says of the e-signature market. “It’s a two-sided market that requires the sender and recipient to use similar software.”

Bengo4 is trading at about 20 times revenue, though if you pro-forma its CloudSign business it looks even cheaper – entering at 0.3 times revenue.

Kahn thinks CloudSign can grow its customers by four times and it will only have penetrated 5.5 per cent of Japan’s companies with more than 10 employees. Assuming no multiple expansion, it assumes a double or 99 per cent upside by 2024.

In its reward case, if penetration goes to 6.3 per cent and you apply slight multiple accretion, it could be more than a three bagger.

 

Sohn: Techtronic ‘more of a tech company than industrials’
Author: Alex Gluyas

Cooper Investors’ Qiao Ma says that despite cordless power tools provider Techtronic Industries being an industrials company, it’s really a technology company at heart.

Naming the Hong-Kong listed stock as her top pick at the 2021 Sohn Hearts & Minds Conference, Ms Ma explained that Techtronic is more of a Silicon Valley company than an industrials company.

“Every component that goes into a Techtronic power tools product, every step of the production process has been carefully thought through to make sure they stay at the forefront of technology,” she says.

“Let’s use batteries as an example. As early as 2004, Techtronic migrated its entire toolset into lithium ion batteries.”

The other factor that stands out to Ms Ma is that Techtronic specialises in a niche area.

“This type of obsession and focus into one thing give them an incredibly deep and nuanced understanding of its customers,” Ma says.

Over the past 12 months, Techtronic has released an onslaught of 500 new products, and going forward, Ma says the company’s category expansion is limitless.

This type of product innovation also translates into financial year performance.

Over the past 13 years, Techtronic has been growing sales at 13 per cent per year, and even more impressively, it’s been growing profit at 26 per cent per year.

“That tells us one thing, that Techtronic is not growing sales by cutting prices and competing on volume, it’s really creating a premium end product and commanding a very healthy product margin,” she says.

It means Ms Ma is excited about the future of Techtronic for three reasons.

The first is that Techtronic is going out of its core market in North America and expanding into Europe and Asia. Ms Ma is also bullish on the company’s category expansion, and its operating margin expansion.

While Techtronic is currently a $170 stock, Ms Ma believes within 12 to 18 months, it will climb to $215.

This article was originally posted by The AFR here.

Licensed by Copyright Agency. You must not copy this work without permission.