Buy Hold Sell: 3 tech titans and 2 long-term winners
When it comes to the crème de la crème of the investment world, very few companies compete with the likes of Tesla, Tencent and Microsoft.
Those who invested in these tech titans at their listings are no doubt laughing all the way to the bank - a mere stopover, before jumping aboard their 500-foot superyacht in the Maldives to celebrate their success with the world's finest caviar and a case of Cristal.
Why? Well at IPO, Tesla's shares were just US$17, Tencent's shares were HK$3.70, while Microsoft's were just US$21. Now, our superyacht-boasting friend would be revelling in returns of 4,265%, 18,468% and 1017% on his investment.
In this episode of Buy Hold Sell, Livewire Markets' Ally Selby spoke to Vihari Ross from Magellan and Chris Demasi from Montaka Global Investments to see whether these mega caps can still rain down returns for investors.
In the case that they don't, we asked Vihari and Chris to bring along one stock that they think can continue to make bank for investors over the long-term. So you too can one day sit back and relax in the comfort of your superyacht.
NB Superyacht not guaranteed with investment.
Note: You can watch, read or listen to the discussion below. This episode was filmed on 17 February 2021.
Ally Selby: Hello and welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and today we are talking giant global names and whether they still have giant returns in their future. To answer this very question, I'm joined by Vihari Ross from Magellan and Chris Demasi from Montaka.
Ally Selby: First up, we have Tesla. It's had nothing short of a spectacular run of late. It's up around 1000% since its COVID low, but it's a pretty controversial stock, everyone's kind of got their own opinion on it. Vihari, I'd like to start with you. What's yours? Is it a buy, hold or sell?
Vihari Ross (SELL): This is a definite sell, from my point of view. Look, Tesla is an interesting business, we've got Elon Musk, who's a pop culture figure in his own right, but ultimately what we're looking for is businesses with sustainable advantages and the ability to exploit them over time. Ultimately, what we're looking at here is a car manufacturing business, which is a very competitive space to be in. They're not leaders also in driverless car technology, that's Waymo, which is owned by Alphabet. I think with this stock, you've got a whole lot of exuberance, but not a lot of investment discipline.
Ally Selby: Wow. That's quite surprising. And how about Chris? Is it a buy, hold or sell for you?
Chris Demasi (HOLD): It's a hold, Ally. The electronic vehicle market is going to grow 20 fold within the next decade. And they've also got a whole bunch of real options, anything from AI chips to battery technology, and anything else that Elon Musk can think of at the time, so it's a very difficult one to sell or to short on that basis.
Tencent Holdings (HKG:0700)
Ally Selby: Next up we have Tencent Holdings, it owns the likes of WeChat and also a 5% slice of Afterpay. Chris, is it a buy, hold or sell for you?
Chris Demasi (BUY): Tencent is absolutely a buy. Tencent has a monopoly on Chinese internet traffic and it's growing its revenues at 30% per annum. It has 1.2 billion monthly users on its app, doing everything. It's a super app, doing everything from ordering food, to doing their banking, to chatting with their friends. We think that's underappreciated, but what else is underappreciated is their $150 billion or more portfolio of investments in other companies and internet platforms around the world. They've got investments in companies like Spotify, Epic Games, and a whole bunch of others that are going to create enormous value over time, and that's being overlooked by the market.
Ally Selby: Chris reckons it's a super app, so is it a super buy or a super sell for you, Vihari?
Vihari Ross (BUY): Ally, it's a buy for me as well. Tencent has a remarkable platform in WeChat and that's given them the ability to connect consumers, connect businesses and the ability to have an advertising business off the back of that. I'm sure Facebook would love to have the monetization that Tencent has already achieved. And of course, there's more opportunity still to come through their other investments, including financial services and things like that as well.
Ally Selby: Let's stay on you. Next up, we've got Microsoft. It's share price has lifted around 85% since it's COVID low. Is it a buy, hold or sell?
Vihari Ross (BUY): This is a buy for me as well. Microsoft's thesis is really predicated on the opportunity within the cloud, as well as it's very strong sort of incumbent businesses as well. I think we've got an enormous opportunity through the cloud platform, they're second to Amazon's AWS there, and that is a very substantial opportunity where there's only going to be three key players, themselves included as well as Google. The next piece is obviously Office 365. That's really expanded the opportunity set. The third component is just their legacy server and operating system. That was something that was written off many years ago for Microsoft, but the reality is that businesses need that platform.
Ally Selby: Do you agree, Chris? Is it a buy for you?
Chris Demasi (BUY): It's absolutely a buy for us. I think when it comes to revolutions in the computing industry, the next Microsoft is Microsoft. Microsoft capitalised in the 1990s on the PC revolution, and now it's taking advantage of a shift to cloud computing within the enterprise and that's going to add about $6 trillion in annual IT spend for enterprises around the world.
Ally Selby: Okay, so Microsoft is a buy from both our fundies. We've also asked them to bring along today one global stock that they think can continue to deliver returns over the longterm. Vihari, let's start with you. What's your global pick and why?
Estée Lauder Companies (NYSE:EL)
Vihari Ross: Well, Ally, I thought given we've talked a lot about these tech companies today, I thought I'd moved to the consumer space. My pick is Estee Lauder. This is a business that has a remarkable luxury brand portfolio. It's got a number of billion-dollar brands; Estee Lauder itself, as well as high tier brands like La Mer.
This is a business that is benefiting from that growth in the Chinese middle-class consumer and the ability for them to spend more on personal goods over time. This is a business that's been quite resilient through this pandemic, but at the same time, there's an option value sitting within Estee Lauder. And that's obviously the return when this pandemic is eventually over. There's this element of the roaring twenties coming back, people will want to be going out again and people will travel again and want to participate in life, far more than they are today. And that's sort of sitting within Estee Lauder as a future opportunity, as well.
Yeah, really interesting. How about you, Chris? What's your long-term growth business?
CME Group (NASDAQ:CME)
Chris Demasi: I think one that you can buy now and put in the drawer for a very, very long time is CME Group. CME is the world's largest derivatives exchange, and it benefits from classic marketplace network effects. The buyers come there to meet the most sellers in the world and the sellers come there because there are the most buyers in the world.
And in fact, on top of that, they also have effectively a government-mandated monopoly over the clearing of these derivatives products, which means that the buyers and the sellers can't go anywhere else, once they start using CME. It's one with an impenetrable moat that is going to last for probably our lifetimes and more. And it's also going to grow strongly.
Ally Selby: Well, it seems our fundies still believe that there are some mega caps with further room to grow, but we'd love to know what you think. Let us know what mega-cap you think has further room to run in the comments section below.
Questions Without Notice
Ally Selby: This year, we are getting you, our viewers, involved in Buy Hold Sell by getting you to send in your questions for our new segment, Questions Without Notice. Thank you to those who sent in their questions, neither Vihari nor Chris has any knowledge of the questions that they're about to be asked. First up, we have a question from Nick who asks:
Are we witnessing a changing of the guard among the Big Five tech stocks? If so, what companies do you think could take their place?
Chris, I might start with you. What do you think?
Chris Demasi: Well, I don't think we're witnessing a changing of the guard. I think the Big Five tech stocks have durable, competitive advantages, and it means that they're going to lead their marketplaces. And in fact, they're going to grow into adjacent marketplaces for decades to come.
Ally Selby: Vihari, do you agree, or do you feel like maybe in 20 years time we could see a whole new Big Five?
Vihari Ross: Yeah, no, I think I do tend to agree. Look, that's not to say that there couldn't be another interesting company that's able to build a network over time. But I think one of the advantages that the large incumbents do have is their existing scale, is their existing ability to invest behind digitalization efforts even of itself. And I think even looking at the cloud network that is being built, you have Amazon there, you have Google there, and you have Microsoft there. And the ability of any other player to really compete with those three over time is becoming increasingly unlikely. I think the Big Five tech companies of the future are likely to be very similar to the companies that we see today.
Ally Selby: Next up, we have a question from Finn, who says:
The idea of disruptive technologies has really taken over the investment landscape recently. Do you think this strategy of investing only in disruptive technologies is sustainable?
I'll stay on you Vihari.
Vihari Ross: It's an interesting question. I think disruption is a bit of a fashionable word, but I think disruption just represents a change in the way we live our lives. I think the way that we think about disruption is, what are the changes that are lasting and who were the beneficiaries of those things? I think just getting caught up in the concept of disruption and "all technology companies are winners" is a mistake at the same time.
So we like to think about the businesses where we can have conviction that their investments are going to lead to lasting change or lasting disruptive change, but equally, the businesses that are resilient to lasting change. And that might be the human element of things that just won't change in the way we live our lives, regardless of what's happening in technology.
Ally Selby: Chris, do you agree, is this kind of strategy of investing only in disruptive technologies, perhaps a little bit futile?
Chris Demasi: Well, I think it's a fantastic strategy if you can be clear about identifying who the winners are going to be in those marketplaces for the disruptive technologies and if you can be convinced that those marketplaces are going to be large and growing marketplaces for a long, long time.
I think there's been a lot of tears investing in digitally disruptive technologies previously. The 3D printing companies 10 years ago were pretty exciting and they lost their investors about 90% of their money. So, it's not just about getting behind the next fad or the next idea.
Having said that, it's also not just about investing in singular narrowly focused companies to be able to invest behind this theme of digital disruption. You could also invest in some of the large mega-cap technology stocks that are investing heavily behind change and disruption all around the world.
Ally Selby: Well, that wraps up Questions Without Notice. We hope you like the new segment. If you do, why not give the episode a like. Remember to subscribe to our YouTube channel so you never miss an update.
Do you have any questions for our fundies?
Next week, Aberdeen Standard's Michelle Lopez and Monash Investors Simon Shields will take you through the highs and lows of reporting season, as well as how they have positioned their portfolios since. If you have any questions for our fundies - whether it be on tips for assessing results or stock-specific analysis - let us know in the comments section below.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.