Wyatt Research is doing another “how to buy pre-IPOs” seminar that’s actually a hard sell for his Million Dollar Portfolio ($795/year), and this one’s built on the “get in early on Flipkart” idea.
Flipkart, if you’re unaware, is the leading e-commerce brand in India — sort of like the “Amazon of India,” though it’s very early days in Indian ecommerce and the competition is likely to be fierce. The headline that seemed to catch some attention from Gumshoe readers was…
Walmart Quietly Plans New IPO to Crush Amazon
And Wyatt’s email said that…
“Inside this exclusive briefing, I’m going to discuss how to secure your private shares.
“Walmart… Amazon… Google and Microsoft ALL tried to BUY this top e-commerce company.
“Now, it’s your chance to get in on the ‘ground floor.’
So the implication in the seminar, at least the part of it I listened to, is that you can get “free shares” of Flipkart from an undiscovered venture capital firm… essentially, that you can buy part of the portion that Walmart will not own (Walmart’s deal, announced but not finalized, is to buy 77 percent of Flipkart for $16 billion).
And he thinks that once the approval happens, the value will rise… and when Flipkart eventually gets spun out by Walmart and goes public, perhaps you’ll own shares of something hugely valuable.
So what on earth is Wyatt talking about? Is it worth spending $795 to get these “special reports” from Million Dollar Portfolio about his favorite pre-IPO investments?
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Well, the first three investments he teases in the “seminar” are all ones he has talked up before, the fairly well-known (though still small) funds that allow small investors to buy into relatively late-stage private/venture capital investments like Lyft or Palantir… those funds that get teased by Wyatt regularly, and usually feature in these recurring “seminars,” are Firsthand Technology Value (SVVC), GSV Capital (GSVC), and SharesPost 100 Fund (PRIVX), none of which are invested in Flipkart.
SVVC and GSVC are traded daily and both trade at steep discounts to their portfolio value, PRIVX is a limited-access mutual fund that can be bought at NAV any day, but only sold once per quarter (they call it a “closed-end interval fund”). I’ve written about those several times, most recently here (and do still have a small investment in PRIVX), so won’t go into more detail… it’s this Flipkart-related one we want to learn about today.
Wyatt calls this his… “#4 International Venture Capital Fund,” and these are the hints he drops in his presentation:
“Publicly traded stock
“100 year history of making amazing investments
“started in newspapers and magazines
“diversified into the internet in 2001.
“Invested $31 million in a Chinese Internet company, today worth over $100 billion.
“Owns 11.2% of flipkart, and has large exposure to India, China, Africa and the U.S.”
And he says that, “By investing here, you immediately own flipkart” and are also getting exposure to these other hot trends around the world:
“Meal delivery (like Blue Apron)
“Classified ads (like craigslist)
“Online travel (like Expedia)
“Online payments (like Paypal or Square)”
And he gives the impression that this is like investing in US tech companies in the 1990s, before the winners are determined… and says this “venture fund” has investments in 61 companies.
Like Firsthand Value or GSV Capital, it’s trading at a discount to the value of those investments — Wyatt says the value of the investments is around $88 a share, but today you can buy for $50, so the stock is worth 76% more than the current share price… but it’s worth even more, because the value of the investments will continue to grow.
And, of course, he reiterates that “I am convinced that you’ve never heard of this company before in your entire life.”
Which certainly isn’t the case if you’re a longtime Gumshoe reader — but, of course, not everyone is as wise and well-informed (and good looking) as you.
Wyatt says that since the stock is trading at less than just the value of its shares in that Chinese internet company, you get Flipkart (and all their other venture investments around the world) “for free” — so that’s where the “free” bit comes in.
Who is it? Well, we needn’t even pull the Thinkolator out of the garage for this one — as you might have noticed, there aren’t exactly dozens of companies out there who’ve made $30 million venture capital investments that turned into $100+ billion windfalls.
In fact, there’s only one.
So yes, as you might have guessed, this is our old friend Naspers (NPSNY) — which, though perhaps not as well known as its largest portfolio company (that “Chinese internet” stock they own almost a third of is Tencent), is certainly well-known by many investors… and it’s the largest company on the South African stock exchange.
Actually, it’s the largest company in Africa, period, despite the fact that their “legacy” holdings in African media are actually fairly small, and quite meaningless in comparison to their investment portfolio in Tencent and other investments spread across India, South America, Russia and elsewhere, mostly in the developing world. Naspers started out in life as a South African newspaper publisher, and expanded into pay TV and similar media businesses across Subsaharan Africa before dipping toes into various online ventures starting 15-20 years ago, with Tencent by far the most important of those.
So does investing in Naspers let you “become a tech insider” and invest early in “off-limits” tech companies?
Well, kind of, I guess… though you’re not going to get any long-term exposure to Flipkart. Flipkart may end up being “Amazon 2.0” in India, I suppose (though Amazon is certainly investing in growing its own business in India, as well, after failing to acquire Flipkart itself), but Naspers, which has been a Flipkart investor for more than five years, is selling its roughly 11% ownership of Flipkart to Walmart as part of the acquisition. If Walmart ends up someday spinning Flipkart off as its own affiliated company, as they’ve indicated is the long-term plan, and as might be required by the terms of the deal, then Naspers will not participate in any of that — they’re taking their $2.2 billion and heading home (they invested about $600,000 for their stake over the years, so their profit is $1.6 billion).
And yes, Naspers does have at least 60 other venture-stage investments around the world, so it’s technically possible that you’ll be “buying in early” on 61 “red hot IPOs” — though if the odds play out as they usually do, of course, most of those companies will never amount to anything… and certainly there will never again be a venture return like Naspers’ investment in Tencent.
I owned both Naspers and Tencent many moons ago and sold out of those positions, missing a lot of the recent fantastic-ness of Tencent, but I’ve been buying Naspers in recent months, mostly as a way to get shares of Tencent at a discount. Tencent continues to be an incredible colossus as the dominant social media company in China, and one of the stronger companies in gaming, payments, video and all else digital, with fantastic growth (a $500 billion company that’s still growing revenues at 60% a year? Amazing!) … and all this despite the fact that last quarter’s earnings indicated that competition with similarly powerful Alibaba is hurting their margins a bit.
But I wouldn’t expect Naspers to close that “discount gap” anytime soon — yes, they trade at a huge discount to the value of the Tencent shares they own, and they have something like $12 billion in cash now to play with (they sold 2% of Tencent earlier this year, in addition to the pending Flipkart sale), so they’re making more deals and have begun, after some shareholder pressure last year, to think about how better to monetize some of their investments on a regular basis as a way to help the stock trade at something closer to its real value.
Those things will probably matter on the margins, but when it comes down to the value of Naspers the price of Tencent shares is really the only thing that matters — Tencent today is a $500 billion company, so the 31.2% of Tencent that Naspers owns should be worth $156 billion. Naspers does have a tiny bit of debt, though that’s easily wiped out by their cash even if you don’t count the $10 billion worth of Tencent they sold since the last time they reported their balance sheet… so we’ll just keep it simple and say that Naspers, with a current market cap of $109 billion, trades at almost exactly a 30% discount to the value of its Tencent holdings. And yes, whatever value you ascribe to the $10 billion+ in cash, their other (much smaller) holdings in publicly traded stocks like Mail.ru and MakeMyTrip, and their (smaller still) venture investments in dozens of other companies, their legacy media busienesses, is “gravy” on top of those Tencent shares.
Put it another way, Naspers’ share of Tencent, assuming no taxes are due on the capital gains (Naspers says these shares are held offshore and not subject to taxation), is worth about $72 per Naspers ADR, and each Naspers ADR trades at about $50 today.
Investors have gotten impatient with the fact that Naspers has not “monetized” the value of its Tencent holdings — and that’s true, but it’s been true for years, and if they had taken their profits five or ten years ago, when investors were similarly pressuring Naspers management, then Naspers would not be a $100 billion company. Their recent success has been built entirely on the back of that one Tencent investment, so I can understand how cautious they are about selling it or trying to narrow that discount.
So the way I think of it, Naspers is a slightly complicated way to buy Tencent at a 30% discount, and the rest of the Naspers holdings will work themselves out over time, may add some value (as Flipkart just did), and probably, at the very least, won’t be so bad that they erode the value of the Tencent stake.
And if you effectively buy exposure to Tencent at a 30% discount, that means you’re paying a trailing PE of about 32 for Tencent, instead of the current trailing PE of 46 that Tencent trades at today. There’s some risk that comes along with that, particularly because that minority stake in Tencent represents the single most valuable financial asset in Africa and could be the target of regulation or taxation, but I’m willing to take that risk to get that discount — and I’m relatively optimistic that there will be more Flipkarts in Naspers’ future… even if there will never be another Tencent.
That’s just me, though — it’s your money, so it’s your call… interested in buying Naspers because they’re making this profit on Walmart’s Flipkart deal? Think a discount on Tencent is appealing, even if that discount has been pretty persistent? Think this is all ridiculous, and that Tencent itself is headed for a fall? Let us know with a comment below.
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