Investment opportunities in Silicon Valley and the Americas

Garry Laurence

Profeta Investments

Feedback from Silicon Valley

I attended a technology conference in San Francisco in March. Whilst most companies are still seeing continued growth in demand for their products, their growth rates are slowing this year as companies are getting tighter with their spending. Amy Weaver, the Chief Financial Officer (CFO) of Salesforce, made an interesting comment when she said that now you have to convince the CFO to buy your products whereas before you were selling to the chief technology officer. Companies like Amazon are still growing but the growth of their core products like AWS are slowing from high teens to low teens growth. Certain parts of technology are in a downturn, especially on the memory chips side. Jeff Lawson, the CEO of Twilio was open in saying that it is a new era where there is no more free money and they need to run their company for profitability now. This has been evident with many technology companies announcing significant layoffs in the past six months like Meta, Alphabet and Microsoft to readjust their cost bases. Despite these job cuts, we think many of these companies are just cutting back on over-investment and positioning for a period of slower revenue growth.

We have taken the opportunity to buy into a number of technology companies as valuations have come down. We recently bought into Alphabet as fears around competition from Chat GPT has created a good entry point for our investors. Ruth Porat, Alphabet’s chief financial officer, was at pains to emphasise the many years of research and investment that Google’s engineers have made into artificial intelligence (AI). They use AI to help advertisers maximise their return on investment and use it in generative AI for storytelling. They have also been using AI in their search engine and will launch many more tools outside of Bard. For instance, if you want to do a multi-modal search, where you want to take a picture of a lasagna and search for the best place to eat it in Sydney, they are the only search engine that can offer this multi-modal search utilising their google lens and over 12 million search queries. Alphabet has been using AI for ten years now and it is deeply ingrained in many of their products like Google cloud. So while the hype around Chat GPT caused a jump in Microsoft’s share price and a drop in Alphabet’s, we think this is an over reaction and creates a wonderful opportunity to buy into this franchise at an attractive valuation.

We have also been buying into a number of software companies as while their growth is slowing, we expect growth to pick up again as economies recover over the next few years. We recently invested in Box, which provides enterprise software for cloud content management, IT and administrative controls, as well as governance and security. Whilst the company is seeing some macro and foreign exchange headwinds, earnings are still expected to grow by 20% this year. There will be continued underlying demand for their services and they offer a cloud first, multi-tenant software as a service platform, which allows them to differentiate from legacy competitors.

We were very impressed with Mikael Lomadtze, the founder of Kaspi, one of our portfolio positions. Kaspi is one of the leading e-commerce and payments players in Eastern Europe. They have created a super app for consumers and merchants and have 14 million monthly visitors and 8 million users per day. Only Wechat has a higher engagement than them. If you compare their app to Paypal, Kaspi’s consumers transact with them 60 times a month compared to Paypal’s users at 60 times per year. Kaspi is expecting about 25% total purchase volume growth this year and continues to sign up merchants across a variety of industries, adding travel and grocery recently.

We were excited to see Elon Musk present at the conference but were a little shocked to hear that Twitter is still losing $3 billion a year given the substantial spike in interest costs. Elon has been cutting costs aggressively and has big plans to increase the monetisation of Twitter’s audience and add new services. At the moment, Twitter has 120 million hours of human attention per day but only makes 5-6 cents per hour per user. He has big plans to encourage advertisers to create ads that are more like educational content and wants to turn Twitter into a super app. It will be interesting to watch the company’s evolution under Elon’s guidance.

AFYA

I went to AFYA’s headquarters in Sao Paolo and spent several hours with Luis Blanco, AFYA’s Chief Financial Officer. After touring their facilities and quizzing Luis and their head of investor relations, I left more confident in the investment and have continued accumulating shares.

AFYA is the leader in medical colleges in Brazil with 8% market share and a target to get to 15% by 2025. Brazil only has 2 doctors per 1000 inhabitants versus the OECD average of 3.4. We expect the underlying demand for medical colleges to be strong and for the government to continue to slowly increase the number of regulated seats, which AFYA has been benefitting from. They currently have 18.000 medical students and continue to build out medical colleges predominantly in the north of Brazil. With price increases and growth in the number of students, AFYA has a clear trajectory of low teens organic revenue growth.

AFYA is also a leading medical technology company providing practice management software and technology tools for doctors, students, pharmacies and the medical industry. AFYA’s core digital businesses include Medcel, Whitebook and Iclinic. Medcel provides online residency preparatory courses, Whitebook is an online app that assists doctors in clinical daily decision-making, such as prescribing the best drug. Iclinic is a medical practice management software that provides a customer relationship management system as well as accounting and a place to electronically store medical records. These digital businesses as a group are expected to grow at about 30-40% this year.

We see a tremendous opportunity for companies like AFYA to grow in the emerging Brazilian economy. Brazil has the 12th largest GDP in the world and a population of 215 million people. However, GDP per capita is only $10,000. AFYA is in a prime position to benefit as the Brazilian economy matures.

What is most puzzling about AFYA is how cheap the company is. Given that it is listed in the US, it has fallen with a sell-off in small capitalisation stocks, especially those that are not domiciled in the US. Bertelsmann, which is a German private multinational media conglomerate, recently bought shares from the founder at $25 and the company is trading at $11 on the Nasdaq. Bertelsmann continues to acquire shares on market and now owns 53% of the company. Despite the company’s consistent double-digit earnings growth, with a 5-year CAGR of 38%, the current price-to-earnings ratio is only 9x, well below the 30x it was trading at a few years ago. Sometimes assets are not valued appropriately on the listed market, and these are the opportunities we look for around the world. AFYA is now our largest position. 


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Garry Laurence
Chief Investment Officer
Profeta Investments
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