Investment update May 2022

The share prices of our investments have been significantly impacted by global fears over the last two quarters. Consumer technology companies have been squarely in the cross hairs of this fear with the largest impact occurring in companies exposed to ecommerce and digital advertising. The war in Ukraine and lock downs in China have further constrained supply chains. The result has been lower demand for advertising and lower ecommerce sales. Both factors are transitory and will recover when supply chain pressures ease.

Our investment philosophy

We acquire our portfolio companies paying close attention to the long‐term economics of each business. We don’t buy them because we think they will be higher in the next quarter. We do so because we believe in the strength and durability of each business. When a company falls in price, we immediately return to test our investment thesis. If it is intact and we retain our conviction, we may add to the position. Lower prices provide opportunity.

Our portfolio companies are selected for their ability to grow irrespective of the macroeconomic back drop. They are supported by structural growth drivers like the growth in digital advertising and ecommerce. The most recent quarterly earnings season revealed these drivers continue to grow, albeit at a slower rate. The effects of inflation and supply chain imbalances have impacted the  global economy and every business.

We understand no‐one likes lower share prices. However, it is imperative we focus on the strength of our companies and their future opportunities. Fortunately, tough times don’t last for ever. Even wars, recessions, inflation spikes, and supply chain bottlenecks eventually resolve. The best way to respond to this uncertainty is by maintaining our investment discipline and focusing on the long‐term economics of our companies.

Zillow

Zillow, a major Portfolio holding, is the leading real estate website in the US. It has experienced share price decline in recent months and is now trading with a market capitalisation of $9 billion. Yet it boasts $3.6 billion in cash and marketable securities and $1.6 billion in debt. We expect it to deliver around $1 billion in operating profit this year and forecast $2.25 billion by 2025. Overnight, management announced an additional $1.0 billion buyback which we expect to begin imminently. The stock is exceptionally cheap and highlights one of the valuation anomalies in the market today.

We see similar stories across much of our portfolio. And while we do not know what the economy will do over the next 12 months, we are confident our companies will deliver higher revenues and profits in the years ahead.