Alibaba, Tencent, Facebook & Micron : Analysing My Highest Conviction Positions

as investing legend charlie munger says you don't get rich from buying or selling you get rich from sitting on your assets so it's easy to get caught up in trying to find the next hot stock or potential 10 20 bagger or on the contrary even seller stock that is either down or has been moving sideways for a while but there's various pieces of evidence that show the majority of the time these actions are detrimental to portfolio returns actually any action or activity can be detrimental to portfolio returns and what really allows investors to outperform and build wealth is buying and holding ownership shares in businesses that can either internally compound their intrinsic value or distribute cash to their shareholders for them to reinvest as they see fit and the key word here is compounding compounding obviously being the eighth wonder of the world is what causes outstanding results over time but for compounding to actually take place you need to not interrupt it unnecessarily that means holding on to your investments for a long period of time without touching them and this is much easier said than done in reality the daily weekly and monthly even yearly news and fluctuations in the market can distract you from what's important which is you own a stake in a business and the quoted price of the stock is not a measurement of true value so what i see as a key ingredient to getting around this issue and being able to control your mind and hold your investments for a long period of time is conviction now conviction in your investments is earned it's not given so to gain conviction you need to do a lot of research analysis on a company understand the business model understand the addressable market and the customers of the business assess the management team as well and then doing the impossible task of trying to predict the future but how i get around this with my portfolio of stocks is one ensuring i run a concentrated portfolio it's tough to have a true research-backed conviction on 30 stocks especially if you have another day job as well like i do and then also these businesses need to be in markets that i can understand and businesses that i can understand but more specific to the actual investment process it's ensuring i have detailed but easy to understand long-term thesis for the investment and i actually document that and then third is investing with a margin of safety that means the stock price sits far below the value i place on the business that way even if my thesis proves to be wrong i'll still do okay and have peace of mind that my investment will do okay one bonus factor additionally to this is finding smart investors with the same investing strategy who own the stock as well if you can find their thesis that's even better but that's more of a reinforcement you really you know should be doing all of things yourself to gain a true conviction so i thought it would be good to run through some of my highest conviction positions while summarizing why their high conviction and how this allows me to be focused on holding for the long term and benefit from compounding hopefully this will help you guys uh look at how i get conviction on a position how i look at a business and how i look at some of my holdings in my portfolio and hopefully it'll also help me reinforce a lot of the conviction that i do have in these businesses so there's an alignment of interest here so why don't we start with my highest conviction bet which also happens to be the largest position in my portfolio and that business as you may have guessed already is alibaba so the summarized long thesis for alibaba is underlying economic growth in china and the rapidly increasing internet economy which has contributed to alibaba growing at near 40 over the past five years these tower tailwinds still exist but so do more importantly some more industry-specific secular trends such as the rapid development of cloud infrastructure to meet internet demand in china digital commerce growing in the double digits still and hundreds of millions of chinese people rising to the middle class in the next four to five years which will give the country a much higher gdp per capita and increased purchasing power for individuals and because of these secular talents that are behind alibaba as a business i'm most focused on three areas of their business now being e-commerce the core commerce section this is the cash cow part of the business that produces around 35 billion in ebitda annually and that's essentially earnings before interest taxes and amortization so cash profit and it's still growing next is alibaba cloud the largest cloud provider in china growing at near 50 kaga and also starting to contribute towards profit now lastly and financial china's largest payment platform with alipay and being a fintech company loan business alibaba has around 30 equity stake in and financial and has started to earn sizable profits from that in the past two quarters so with these three core parts of the business i believe alibaba's growth will quite reasonably be in the range of 20 or above for the next five years this is also with the possibility of a margin expansion now you might be thinking margin expansion their margins have been contracting for the parcel of three to four years but what i'm on about is the 35 billion u.s dollars that the core commerce marketplace produces being used to fund the other loss-making areas of the business like cloud like the digital media assets and some of the international initiatives at some point these loss-making parts of the business will either be profitable or shut down and the segmented profit number that 35 billion is almost double what the group's reported operating income is today so alone that would be around a 30 margin on the revenue today if we just take that marketplace commerce ebitda and in other words you know they could shut down all other areas of their business accept core commerce and the marketplace and they'd essentially double their reported free cash flow or earnings from where they are sitting today so that's what i mean when there could be easily a margin expansion in the future so that's the high level thesis um how do i also have a margin of safety with alibaba which will enable me to hold the stock for the long term even if my thesis starts to play out differently than i've just laid out there well i won't go into the valuation in too much details that's just my opinion but with the stock selling at only 11.6 times core commerce editor and giving guidance to hit billion of revenue in 2022 which on that hypothetical 30 underlying profit margin is around 43 billion in underlying cash earnings excluding the impact of those growth initiatives now that is insane at this price you're buying a business that's growing above 20 25 even for a single digit pe and i estimated based off a distribution of scenarios that alibaba's intrinsic value could be anywhere between 225 per share to 300 dollars per share and it's currently you know 40 off the middle point of that distribution meaning even if the bearish stance on china remains and alibaba don't hit their growth targets we still end up with a very good result and meet my hurdle rate of return which is around 15 now the next company which carries a similar thesis to alibaba is tencent and this is actually a smaller position than i'd like it to be at the moment but i've no doubt i'll add to it in the near future if the prices stay where they are and the summarized thesis 410 carries you know the same macro factors as alibaba so i won't spend too much time on that that's the underlying economic growth rapidly expanding internet economy and middle class as well as things like cloud and fintech growing faster than in any other region of the world and 10 cent covers you know almost all areas of the internet in the internet economy uh and that's social media payments digital ads gaming cloud just to name a few these are all areas of the market that are set to expand at double digit rates over the coming years maybe even above 15 percent as an average and and 10 cent really is the controller of the entire ecosystem you know meaning that it should take the line share of that growth and it's shown its ability to spawn into new areas and scale them rapidly you know in the event that some of these core areas start to slow down in the future what's more is that you know 10 cents operating segments are obviously highly profitable growing fast and undervalued by the market based off my opinions but what really separates the thesis from alibaba's is the huge investment portfolio that they have in some of the most promising companies in the world translating this over to a margin of safety 10 cents ev to ebitda is in the region of around 18 times which you know admittedly is very cheap but additionally to that i haven't done you know the calculations because it's almost impossible to do that at this point but if you look at the earnings power and underlying profit of some of the companies they own equity stakes in say such as c limited 30 share jd.com pindordo and tesla and more you know you could reach a single digit multiple of operating and equity earnings versus today's market cap which is you know quite remarkable for a company that's growing as quickly and as consistently as tencent so the recent sell-off has given investors in 10 cent a very nice margin of safety i estimate the fair value to be around 71 to 90 per share depending on which reasonable scenario plays out versus you know stock price today of 60 so that gives us a margin of safety north of around 20 to 25 based on already conservative estimates of what their future may look like again this means if my thesis is wrong and growth slows and we see no multiple expansion maybe even you know a slight retraction still i'll still earn a decent irr over the long term which i'll define as say four to five years now i'm going to try and get through these next ones quickly so i don't spend too much time on this video the next company i have a high conviction on in terms of you know at least my initial investment and holding it for the foreseeable future is facebook again similar to 10 cent i would like this position to actually be bigger than it is but there's the possibility that i'll add to it in the near future and my average for facebook was down in the 220s but i'm still very bullish on facebook's long-term prospects facebook is a cash printing machine that operates you know a duopoly in the digital ads market with google it's a business with one of the largest moats i have ever seen you know this makes me very comfortable about being a long-term owner of the business and additionally you know to this that they're in a market that's growing its spend over 10 per annum that being the digital and targeted ads business which is a huge tailwind for the company plus they have some valuable assets such as messenger and whatsapp that are yet to even be monetized so that's a catalyst in itself and i feel the profitability of the company is also very much underappreciated yes they have 42 operating margins which you know it's fantastic but if you look deeper they also spend 20 of their revenue on r d every single year which is you know seen as a growth spend this is money back into the business to develop their product offering and if you just take half of that r d spend out and place it into say owner earnings or back into operating income you get an operating margin that's around 53 you know and an income number that's around 60 billion u.s dollars annually taking it close to the likes of google in terms of its value and google is obviously valued at around 2 trillion dollars today as a market cap so looks like facebook could have some way to go even still and you know with my average of 220 i'm getting around a six percent earnings yield at the moment and in five years you know that earnings yield could reach 15 in 10 years maybe even 20 to 25 meaning if growth stalled the company could return 15 to 20 percent of my investment annually through a buyback or dividend whilst most likely growing earnings per share and the intrinsic value of the business at the same time so that's not something you can easily find especially in today's market and it will meet my hurdle rate of return with quite some e you know when i bought facebook initially i valued the business around 310 to 320 per share which was based off quite conservative assumptions about their five-year future but they far exceeded my initial expectations meaning you know the true value is probably much higher than my initial calculation and as a reference they're already on track to beat my 2023 estimates for revenue and earnings by the end of this year meaning you know the thesis is still very much intact if anything i wasn't appreciating facebook enough and that's probably visible in my position sizing not being big enough either and so for all those reasons i'm very happy to hold facebook for the long term and in fact i'd love to see 30 to 50 drop so i could buy even more now the last company we're going to cover that i have high conviction on as an investment is micron i recently did a video on micron so you can check for more detail there but essentially the thesis for micron a high level is they operate in a historically bad market and seen as bad by uh investors a lot of people have had a bad time investing in micron in the past and that industry is the semiconductor memory industry and it was bad mainly due to it being fragmented full of unintelligent competition and that created supply demand imbalances that really affected all of the businesses in the industry and essentially due to various reasons such as competition being reduced to only three players which makes it now an oligopoly which is obviously very powerful for pricing and things like that it also contributes to sensible levels of supply and most importantly more unit demand than there's ever been before in this industry so my thesis is micron should not only be able to grow its sales by two to three times by 2025 from where they are today but also they should become less volatile in their results and cyclical in nature which would contribute to maybe even a multiple uh expansion or just you know a stagnant multiple from where they are now rather than the reduction we see at the top end of the cycle so in terms of margin of safety my average for micron is around forty seven dollars per share so i'm already up for around 55 56 in less than a year but i valued micron close to 90 per share the price today is still you know some way off of that so there's still some room to run at least in my opinion i think analysts have this stock a price target of around 115 to 120 per share so they're even more bullish but you know there's more upside potential even than than that realistically micron could reach 20 to 25 billion in pre-tax income by 2025 which even at a modest pe uh say 50 contraction from the pe today get a pe of 10 on that that's around 200 to 300 billion in market cap or around 176 to 320 per share so there's a lot of room for the stock to run and potentially if my thesis plays out i could be on for a 5x in five years needless to say based off of that thesis i'm very much willing to let it play out over the next few years not touch it uh considering my margin of safety now i'm going to start wrapping this up but first i want to explain why this is so important for me to have this long-term conviction in some of these positions and the main reason is these four positions alone where i have this conviction they make up over 40 of my portfolio which means 40 of my portfolio can be left there just to compound and help you know drive my returns over the long term without me needing to worry about stock price movement or keep track of the weekly monthly movements in the market there is of course a number of other businesses in my portfolio that i'm highly convinced of that i've been able to mention today some you know smaller and carrying maybe more upside potential but maybe have a bit more risk and uncertainty involved but really these four that we've just gone through edge it in terms of solid crystal clear easy to understand thesis and a higher margin of safety and i believe if you can get to a point where 40 even 50 of your portfolio is in concentrated high conviction bets then you're in a very good place to sit on your assets and let compounding do its work that's about it for this video thanks all for watching i'll be leaving all of my valuation models on the companies mentioned with price targets on the patreon page for all the patrons and discord members a link will be in the description for any of you who are interested and would like to go and check out all of the benefits you'll get these dcfs as well as access to my recent buyers sells a watch list of stocks and target prices as well as a private discord chat so check that out if you're interested other than that please leave a like if you enjoyed the video let me know in the comments below what you think of all of the stocks mentioned and the thesis i gave subscribe to the channel if you haven't already and i'll see you in the next video good luck with all of your investments

Channel: Finding Alpha

Views: 28,699

Keywords: Stock Market, Investing, DCF, Intrinsic Value, Valuation, Alibaba, BABA, IRR, Discounted Cash Flow, Growth Stocks, Stock Analysis, stocks, cnbc, charlie munger, charlie munger alibaba, alibaba stock analysis, Tencent, Tencent Stock, micron technology stock, micron technology, MU Stock, Micron Stock, techy, Alibaba Stock, BABA Stock

Id: 7XtCVx8qmgY

Length: 17min 7sec (1027 seconds)

Published: Thu Sep 16 2021