This isn’t a brand new ad, it’s been circulating for a couple months now, but I’ve gotten a lot of questions recently and haven’t covered it before… so I’m digging in. The pitch is from Eric Fry, who launched Fry’s Investment Report as an entry-level stock-picking newsletter fairly recently (last summer, I think), and the main ad they’ve been using to recruit subscribers is an obnoxious “I’m in America’s Most Expensive Zip Code” spiel about how the wealthy make money in ways that are far more clever than you could imagine.
The intro push is all about how drastic income inequality or the “wealth gap” has gotten, using his video crew in Atherton, CA to illustrate how much money gets concentrated in these well-heeled enclaves, while kids grow up in poverty or homelessness explodes just a few miles away.
Atherton, if you don’t know the Bay Area, is just one of the uber-wealthy towns spread between San Francisco and San Jose, right in Silicon Valley near Palo Alto and Mountain View and Cupertino… so it’s no surprise that what Fry is really talking about is disruptive technology investing — the kind of investing that made this the financial heart of first the semiconductor revolution and then the internet revolution, and the home of millionaire-makers like Apple and Alphabet who have shaken up the economy of the whole region, boosting city coffers with massive tax inflows but also making it impossible for people without stock options to live anywhere in the area.
But that’s beside the point, the basic spiel is that these rich people know that you have to invest in the next generation of disruptive technologies — and that’s probably true, though in the main they’re wealthy because of the work they do in those technologies, and not because they’re good investors. Here’s a bit from the ad:
“To get the biggest gains going forward, you must make sure you own the fastest-growing, most disruptive, and most profitable ‘outsider’ tech companies available in the markets today.
“I mentioned earlier that I’ve just published a brand-new report on the best tech investments you must make right now, if you want to capture the biggest gains of the next year and beyond….
“One of these firms, for example just reported revenue growth of 25% higher this year compared to this time last year. Another company has increased revenue 46% in the past few years… and another has added a whopping 40 million people on it’s app compared to last year.
“What’s important to realize is, these gains and this growth are all just getting started.
“I’ll show you four (4) revolutionary companies you should buy immediately… and roughly another four you should buy over the next few months.”
It all gets quite squirrely with the promises of exactly how many hot stock ideas he’s going to deliver to you, but the teaser ad itself actually talks specifically about three different stocks, different from that “four revolutionary companies” report that he’s apparently selling… so we’re going to look at the three he actually drops some hints about.
He gives the first one away for free, as promised…
“A few months ago, one of the most remarkable businesses in the world, went public on a major stock market.
“The name of the stock is Prosus. The ticker symbol is: (PROSY).
“And while you’ve probably never heard of it, Prosus is an incredible company.
“What the men and women who run Prosus do is scour the globe for technology companies that are disrupting the status quo…
“Then, they take early stage, major investments in these businesses.
“In one of their investments, for example, they made roughly 500,000% returns on a new internet platform that would soon take over in China.
“It’s one of the best investments ever, in the history of the modern world.
“The great thing is, because Prosus is now publicly traded, you can get in on these incredible deals, too, and potentially make a fortune as a result.”
He talks up the potential of Prosus as basically a venture capital investment fund, owning stakes in a dozen “next PayPal” and “next GrubHub” companies in different countries around the world, and that’s true — though despite the fact that it did recently “IPO,” it’s not at all a new company. Prosus is the global technology investment arm that was spun out of Naspers last year and listed in Amsterdam, in order to raise its profile a bit, hopefully decrease the discount to its investments at which Naspers was trading, and create a bit more liquidity in this business by getting it out of the South African exchange (where it was by far the largest company) and listing it in Europe, a continent desperate for some exciting “homegrown” technology companies.
And while Naspers has been around for eons as a South Africa media company, for most of the past 15 years it’s been thought of as just “those guys who got in early on Tencent.” Naspers invested in Tencent when it was a tiny startup, buying about a third of the company for $32 million in 2001 when it was just a little internet chat technology firm developing a Chinese version of something like AOL Messenger. That stake, now at 31%, is now worth roughly $165 billion as Tencent has grown to become a global colossus and Naspers somehow resisted taking profits… so yes, this is one of the greatest investments in the history of the world, and that valuation has driven Naspers and now Prosus ever higher, becoming such an overwhelmingly huge portion of the business that almost nothing else they does can possibly matter to shareholders.
And by the way, for those who lament that they might have bought something too late, or missed the boat, do note that although the value of that Tencent stake for Naspers (now Prosus) has increased by about 515,000% over 19 years… that’s “only” a compounded annual growth rate of about 57%. 500,000% might seem incomprehensible, but 50% gains sound more do-able — the trick is to find investments that can compound for 20 years as companies mature and evolve, to turn great returns into life-changing ones, and the super-double-difficult trick is NOT SELLING along the way. How much would you have wanted to sell your Tencent shares after five years to take your profits, with maybe 1,000% or 2,000% gains?
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Prosus (PRX in Amsterdam, PROSY or PROSF OTC in the US), is currently valued at about $135 billion, so that’s roughly a 19% discount to the value of the 31% of Tencent that Prosus owns. Naspers before them traded for years at a similar discount to the value of that Tencent stake, sometimes getting to near 40% when sentiment was negative about the South Africa connection, or the ability of Naspers to do anything beyond that Tencent investment.
And Naspers (NPSNY) still controls Prosus, by the way, with a 74% stake, so Naspers shares represent a discount on top of a discount — 74% of Prosus should be worth $99 billion, yet Naspers in South Africa currently has a market cap of $73 billion, so that’s a 26% discount on top of a 20% discount. Which adds up to roughly a 40% discount, pretty much as big as the biggest historical discount at which Naspers has traded in the past. They didn’t get rid of the discount, they just spread it out a bit… part of it is still in South Africa, part of it has moved to Amsterdam.
But that discount is just to the value of the Tencent stake, and Prosus has made a lot of other investments over the years (even if “holding Tencent” has been the most important strategy they’ve ever had, by far).
They do have some thematic organization to the investing they’re doing to try to find the next great technology venture investments… even if, of course, they’re unlikely to come across another lucky strike like that Tencent investment. The areas of focus are really food delivery, payments/fintech and classifieds, and they own or have invested in dozens of companies around the world in those areas. They say their legacy classifieds businesses and payments sector are profitable, and that they’re increasing their investment in food delivery to take advantage of the global opportunity, where revenue growth is dramatically higher.
Prosus has levered up a bit, but they also do have a strong balance sheet with $5 billion or so in net cash, so they are able to continue investing in growth and trying to find their next great companies. Their investments in publicly traded companies completely overwhelm the portfolio and mean that it’s unlikely their investment choices and their smaller investees will make any difference to the bottom line anytime soon — but they also provide a backstop if the venture investing goes poorly or is just underwhelming, as has mostly been the case in the past decade.
And yes, that portfolio of publicly traded companies is mostly Tencent… but they do have some other measurable investments in publicly traded stocks, including 28% of Russian platform/social media company Mail.ru (worth about $1 billion), 22% of Delivery Hero ($4 billion), and 5% of Trip.com (formerly CTrip, about $750 million). So if you toss the Tencent stake in there (roughly $165 billion) you get to a little over $170 billion in portfolio value from the listed investments, or boost it to $175 billion if you include the net cash position. That mean the venture investment fund and their smaller investments (some of which have become profitable businesses), seem to be collectively considered by investors as a $40 billion Coleridgean albatross hanging on Prosus’ shoulders — a burden, not a benefit.
Will that still-large discount ever close? If so, will it close in the right direction? (That is, by Prosus rising in value, not by Tencent falling in value.)
I have no idea.
Prosus is presumably not going to sell its stake in Tencent and return that capital to shareholders, which would be the most certain way to get rid of that discount, and that’s because it would turn this giant company into a small company… and small companies pay their executives a lot less. If they’re going to really narrow that discount, I would guess that they’ll need to have more dramatic investing success somewhere (Delivery Hero has been pretty strong so far), or they’ll need to be more proactive… which would probably mean borrowing against that Tencent stake and using a lot more capital to build a much larger investment portfolio.
All of that is hard to stomach when you realize that the only asset they might want to monetize is also their asset that is most consistently profitable and growing — would you really sell a world-dominating company like Tencent, which is still growing earnings at 40%+ a year, in order to take a risk on dozens of little venture ideas? I don’t envy Prosus management their task, riding the Tencent wave while also still trying to become less dependent on Tencent is a tough challenge.
Intellectually, that persistent discount assumes (at least) two things: that the value of their Tencent stake should be discounted, since it’s so large that they couldn’t sell it immediately at market prices (or that they might run into regulatory or tax trouble if they tried to sell)… and that the rest of the investments Naspers/Prosus has made over the years will be unsuccessful. It seems reasonable to bet on Prosus given the diversity of the ventures they’ve invested in, and the stability provided by that huge Tencent stake, but it’s hard to argue that investing in Prosus or Naspers will necessarily be a better idea than just investing in Tencent.
Here’s a chart, just to illustrate that, of the move that Tencent has made over the past decade, and of the impact that has had on Naspers (which has owned roughly the same 31% stake, reduced only a tiny bit, for almost 20 years):
In many ways, that’s just an illustration of how much better that Tencent investment has been than everything else Naspers has ever done (or Prosus will ever do, I expect)… at essentially any point in the past 20 years, you would have been much better off buying Naspers’ best investment than if you had bought Naspers itself. And though Prosus was designed to help them start to narrow that discount, it hasn’t worked yet — here’s what the chart looks like in the time since Prosus was spun out of Naspers last fall:
Kind of makes you think this persistent discount will, well, persist. Which doesn’t mean Prosus is a bad investment, just that we should keep our expectations a little lower and never assume that they’ll find another Tencent. Even if they are really trying.
I haven’t looked into this one in a few months, but the latest interim result from Naspers is here, and the Prosus interim results presentation is here (both using September data)… they won’t report their annual results (their year ends March 31) until late June. I have owned Naspers and Tencent in the past, and will no doubt be tempted to buy them again someday, but not today.
And what about the “secret” two investments that Fry is teasing in the ad? Here’s a little excerpt of the spiel about the first one:
“It’s the Next Evolution in Online Shopping
“One of the biggest trends in the world today is retail automation.
“In other words: The process of automating how products you buy online get to your front door.
“This is Amazon’s specialty, of course, but there are lots of other companies that are way more advanced than Amazon, which are transforming entire industries.
“They use an automated process involving software, robotics, and other logistical technologies to get products delivered directly to your home, without much human involvement.
“And these companies are going to radically change the way we shop over the next few years.”
OK, so that’s the big picture — what’s the stock? Here are our clues:
“[T]here’s a company that’s a world leader in online-only grocery shopping….
“They have more than 60 technology patents already granted, applied for 100 more patents last year… and have built the most advanced automated robotic shopping system on the planet.
“Their technology can track your grocery order, and get it ready for delivery with almost no human effort….
“And get this: This revolutionary tech company just signed a deal with the largest grocery store chain in the U.S. and the largest grocery store chain in the world.
“Over the next two to three years, they are going to revolutionize how groceries get to your home. The first of their 20 new high-tech grocery delivery warehouses will open soon, in Ohio.”
And apparently he sees this getting much bigger than “groceries”….
“Eventually, this company will transform all of retail shopping. They are already working with pet supply stores… home good stores… and beauty/makeup retailers.
“Yes, this disruptive technology company is going to contribute to the widening wealth gap in America.
“But there’s absolutely nothing you or I can do about this trend except to embrace it.
“It is inevitable. It is the future. And all you can do is either be on the right side or wrong side of this trend…
“I strongly recommend you learn how to invest in the high-tech company behind it—because it’s very likely to be my next 1,000% winner.”
That’s Ocado (OCDO in London, OCDDY OTC in the US), which we’ve covered briefly before (mostly because Kroger (KR) bought into the company as part of their automation partnership a couple years ago, and Tony Daltorio teased Kroger at the time).
Ocado is an online grocer in its own right, with a strong market share in grocery shopping in the UK, but the more interesting business is what Fry is teasing, the Ocado Solutions business that provides their platform to other retailers around the world — so in addition to Krogers, the largest grocer in the US, they’re also partnered with other huge food retailers like Casino in France, Sobeys in Canada and many others. And yes, the first US project in their Kroger partnership is a “smart warehouse” in Ohio that they broke ground on last summer, though they’ve got plans for at least 20 of these “sheds” in the US and have already started work on a few others.
The stock price at Ocado has soared this year, up 50% or so from where it had been trading for much of 2019, and that’s probably mostly because the “online grocery” focus means it’s seen as one of the beneficiaries of the coronavirus shutdown. They’re not yet profitable, and revenue growth so far has actually been pretty low and margins haven’t been rising (partly because the services business is hidden a big behind the larger revenue of their own online grocery business), but clearly a lot of people still see big potential.
Kroger is experiencing a little of that surge as well, mostly because grocery stores are suddenly “hot” again now that they’re almost the only retailers still open and thriving in the US, but also in some small part, perhaps, because they own a big chunk of Ocado that they purchased as part of their exclusive US partnership. That’s not a major factor, Kroger’s Ocado stake is worth about $1 billion these days, roughly 4% of KR’s market cap, but it could provide a little juice if Ocado really takes off.
I’m a little skeptical of the near-term profit potential of this, since Ocado and Amazon and so many others are all trying to figure out how to cost-effectively pick and delivery all kinds of goods, and the Ocado/Kroger deal in some ways seems to have been a panicked reaction to Amazon’s purchase of Whole Foods and their large-scale entry into the grocery market, but they are certainly working in a compelling area and the “story” is on the right trend. Clearly “more warehouse robotics” is the way the future will evolve, and clearly “more ecommerce” and “more delivery” are reasonable bets to make, you’ll just have to decide whether that makes Ocado (or Kroger, for that matter) a buy for you today. You can go straight to Ocado’s website to see why they think you should invest.
Right now, as you can see from their latest earnings presentation here, it’s very much a story of a UK grocery delivery business that’s breaking even, a UK services business for other sellers that’s generating a little cash, and an international business that is in its infancy as they begin to collect fees from their partners (which is the most appealing part of the business to me)… so I’d guess that if you are looking for a fantastic future here it’s going to have to require a little imagination, as you picture Ocado becoming a fast-growing global fulfillment partner for not just grocery, but all kinds of retail, collecting high-margin fees for the use of their robotic warehouse and fulfillment technology. Imagination isn’t bad, it took imagination for early investors in Netflix to foresee that those little DVDs delivered by mail would not only put Blockbuster under pressure, but would soon be supplanted by online streaming that wasn’t even yet technologically feasible at scale 15 or 20 years ago, but it requires some taste for risk in case your imagination gets ahead of you.
So that’s intriguing, though I haven’t thrown money at it yet and they’re clearly in a rapid coronavirus growth spurt for their core UK delivery business that has investors a little excited… maybe I’ll come back to this one the next time the market looks a little less rosy, but I’d have a hard time chasing the stock right here.
And what’s next? The third stock teased has something to do with self-driving cars…
“It’s no secret that one of the great innovations of our lifetimes is going to be self-driving cars and trucks.
“Sure… rolling out all these vehicles will take a few years.
“But remember, just like the cellphone example I told you about earlier, the experts ALWAYS overestimate how long a technology trend like this will take.
“And the simple truth is: The money to be made on this inevitable trend starts now!”
He gives a few examples of companies placing big bets…
“Jeff Bezos, of Amazon, just placed an order for 100,000 vans that will ultimately drive themselves.
“Waymo (Google’s driverless car unit) just ordered 62,000 driverless minivans from Fiat Chrysler.
“The company Aptiv has teamed up with Lyft to log 50,000 successful autonomous taxi rides in Las Vegas. BMW plans to have a self-driving car on the road by 2021.
“There are literally trillions of investment dollars pouring into this trend.
“But most people don’t know that there’s one by far best way to play it.”
So what is that “best way to play it?” Here are our clues:
“You see, there’s a technology company most Americans have never heard of, which has successfully logged more than 1 million miles of autonomous driving.
“And it has developed the platform standard that will be in more autonomous vehicles than any other.
“Already, this firm has partnered with nearly all of the top car companies in the world, including: BMW, Chevrolet, Ford, Honda, Jaguar, Toyota, Mercedes, Volvo, and Volkswagen … and the best technology companies in the world, like Microsoft, Nvidia, and Intel.”
And apparently it’s not an investor darling at this point:
“… not only have few Americans heard of it, it’s also one of the best investment bargains in the world—it’s ridiculously cheap.
“You can buy this company today, hold it for years to come… and potentially make 10-times your money over the long term.”
He also compares it to the fight over cell phone standards:
“This investment reminds me very much of another tech investment I made in cell phone technology, many years back.
“At the time, two different cell phone network standards (GSM and CDMA) were fighting for supremacy. GSM was the clear front-runner, and I recommended a company called Ericsson to take advantage of it.
“My recommendation soared as much as 5,000% in the years to come.
“Something similar is happening today with autonomous driver platforms—although few Americans know about it. You have a chance to get in early and make obscene profits in the years ahead.”
That statement really jumped out at me as odd. It’s hard to imagine that betting on ERIC because of its positioning in GSM technology could have ever worked out better, in almost any imaginable time period, than an investment in the company most closely associated with commercializing CDMA technology, Qualcomm (QCOM), but we’ll take that at face value (after briefly noting, dear reader, that over the past 30 years ERIC has a total return of 354%, and QCOM comes in at 20,360% — ERIC outperformed for a few years coming out of the dot-com crash, from 2003 to 2007 or so, but 2002-2003 is about the only time during which you would have preferred to buy ERIC if you went back to the past in your time machine and made your investments… and then only if you knew you’d be wise enough to sell it in 2007 and get back into QCOM instead).
By the way, the only way to have gotten 1,000%+ gains in Ericsson since 1990, as far as I can figure, would have been to make a fortunately timed options speculation, or to sell right at the 2000 dot com peak. To get 5,000% gains you would have had to invest before 1990, I imagine, and my data doesn’t go back that far.
But anyway, apparently this platform war is happening again… what’s Fry’s stock that has a competing “platform” for autonomous cars?
That’s not a lot of clues, and there are a few companies who could conceivably match those hints — including Alphabet’s (GOOG) Waymo driverless car division or Aptiv (APTV) — but both of those are also mentioned in the and, and I suspect that the company he’s teasing here as “ridiculously cheap” and as “a technology company most Americans have never heard of” is probably Baidu (BIDU).
Baidu 15 years ago was mostly a junky Chinese copycat of Google’s search engine, but they’ve grown up a lot in the meantime even as their prominence in the Chinese internet sector has been overshadowed by Alibaba (BABA) and Tencent more recently… and among other projects (including iQiyi (IQ), the “Netflix of China” that they spun out as a separate company but still control), it has continued to follow in Google’s footsteps with a meaningful autonomous driving business.
Baidu reached a million miles of autonomous driving about a year ago, most of that in China (they do have cars on the road in California, too), so like everyone else they’re WAY behind Alphabet’s Waymo on that front (Waymo is well over 20 million miles now), but that’s still a meaningful business, similar in size to GM’s Cruise division (which I think has the second-largest fleet of autonomous cars in testing)… and yes, since we’re talking “platforms” it’s important that Baidu’s Apollo autonomous driving platform does stand out both because of the large number of partners they’ve worked with, and because it’s open source, which gives some partners comfort even if it also means it might be hard to maintain a disciplined control of the technology (Google’s Android, after all, dominates global cell phone operating systems because it’s cheap, customizable, and open source — but they can’t control it nearly as well as Apple can its closed and proprietary operating system).
Baidu is an interesting company, with a very Google-like core of internet advertising revenue, mostly from search ads, which funds a lot of their other work in things like artificial intelligence and autonomous driving, but they’ve also had a couple periods of falling revenue in the past five years (in 2016 and 2019) that have made investors a bit nervous (revenue has still grown 70% or so over the past five years, so they’re not in free fall, the chart just makes it look like they’ve hit a couple speed bumps).
This is still a growing company, but lately the top-line growth has been very weak compared to the real titans in China’s consumer internet (Tencent and Alibaba (BABA)) as well as several others who might come to mind, like “Chinese twitter” Weibo (WB) or online gaming pioneer NeEase (NTES), and the stock has been a big disappointment during a mighty growth decade — BIDU trades right around $99 right now, and you could have bought BIDU for $99 back in 2010, too, so seeing it back down to that level conjures up visions of bypassed technology stocks of the past (and you don’t have to go that far back into the past — looking at BIDU’s performance in the stock market doesn’t conjure up visions of Google, it conjures up visions of Yahoo).
Still, Baidu maintains a strong share of the desktop search market in China, and it does still have those other businesses, and it’s quite small — the market cap is only $35 billion or so, and that’s not much more than 2X revenue. The investor narrative for Baidu right now seems to be that they got too aggressive in promoting their own web services and directing traffic toward their own properties in 2016 or so, and got embroiled in some scandals over medical searches as well which hurt their reputation, and that coincided with the rise of other platforms that users are turning to directly instead of using a search engine. Much the same way that “going straight to Amazon” has hurt Google search competitively to some degree, going straight to Tmall or using mobile search on WeChat hurts Baidu… and it’s probably not a coincidence that Baidu’s revenue weakness has come at the same time that Tencent’s WeChat launched and began to promote its rapidly improving mobile search technology over the past few years.
And to further match Fry’s tease, it is objectively really cheap, particularly compared to other large Chinese internet stocks. Analysts expect earnings to be quite weak for BIDU this year, and that’s not just the coronavirus talking — expectations were for roughly a 20% drop in earnings in 2020 even before the pandemic hit… but those same analysts do see growth resuming, so if they’re at all right about the ability of Baidu to resume growth (they’re predicting almost 15%+ revenue growth next year, with $8.70 in earnings per share… and another 10% in 2022, with earnings expected to reach $10.38 per share), then the stock is an absolute bargain at 10-12X forward earnings. Clearly, at that valuation, investors are not filled with confidence in those analyst projections. I’d certainly feel safer with the more richly valued Tencent or Alibaba, but those companies are also about 15X the size of Baidu this days, and there’s always some temptation to pick the little guys.
So that’s what I see in the ad from Fry here, looks like he’s touting Prosus, Ocado and perhaps Baidu… and there’s some logical to all of these, though none are tiny or upstart businesses, and all of them are a little more disappointing than you might imagine when it comes to top-line growth, though with some imagination you can picture that growth picking up in the future. Have a favorite in this bunch? A better match for the clues than my Baidu guess for that third one? Other investments you like that are levered to these kinds of trends? Let us know with a comment below.
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Disclosure: Of the companies mentioned above, I own shares of Amazon, Alphabet and Apple, and call options in iQiyi. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.