Please refer to our disclaimers, which can be found in the footnote of this page and here.
Performance for 2Q 2024 was -0.3% net (vs. the MSCI ACWI at +2.9%). We are naturally disappointed with performance year-to-date, but our strategy is not focused on picking short-term winners. We seek to own our companies for a decade or more. Since inception (5½ years), the portfolio has compounded at +17.7% gross / +14.8% net (vs. the MSCI ACWI at +12.8%), representing +5.0% gross (+2.1% net) annualised outperformance. Alphabet was the top contributor for the quarter, while Salesforce and Block were the top detractors.
In 1Q 2024, we reduced our position in Salesforce (price above $300). Salesforce’s stock price then declined after its earnings report. Following this, we added materially to the position at ~$229 and again at ~$217. At the time of writing, the stock is up about +21%. To fund this addition, we realised some of our Alphabet position, as it had grown too large in the portfolio, as well as cash. We also added to our Visa position. We began the quarter with 10% cash and finished with 8%.
We discussed Salesforce in our 4Q 2023 letter. The stock price sold off as the company guided decelerating revenue and cRPO[1] growth. We have always seen decelerating growth as a natural path for the company as key markets have reached maturity (Sales/Service/USA). We were already underwriting a deceleration to a high single-digit 5-year revenue CAGR from FY24 (low double-digit from FY23). As we discussed in the 4Q 2023 letter, there are some potential upsides in gen-AI, uptake in their Data Cloud offering, and industry verticalization. We think the latest earnings report reminded the market that growth expectations were getting a little ahead of reality. We think the sell-off was an overreaction, which is why we added to the position. We give more credit to the potential for improved profitability as the business slows than the market does (a combination of the underlying unit economics and how that translates into profit with lower growth as well as additional cost reductions).
Returns Summary
Portfolio Statistics
In the first quarter, we revisited the Chinese eCommerce landscape to re-underwrite our position in Alibaba, which we wrote about in our 1Q 2024 letter. As a part of this work, we underwrote Pinduoduo. We present our investment case here. Pinduoduo stock rallied significantly while conducting our work so we have not purchased any stock to date.
Pinduoduo was founded in 2015 by Colin Huang (see here for more on Huang and the history). Today, it is one of the largest eCommerce platforms in China with US$35b in revenue, US$553B in gross merchandise value “GMV” (circa 20% domestic online market share), and 700m+ monthly active users (”MAUs”).
The business was first introduced to us in 2018 by a large Chinese asset management firm, who was an influential shareholder while the business was still private. We have been following the company since then, not least because of our position in Alibaba.
Like most eCommerce platforms, it is a two-sided network of consumers and merchants. The core value proposition for consumers is “value for money”, which usually means lower price but also lower quality. The business has been ruthless, both culturally and operationally, in its focus on meeting consumer needs. The business has been ruthless, both culturally and operationally, in its focus on meeting consumer needs. Increasingly, the “merchants” have included manufacturers as the company seeks to backward-integrate supply and lower prices for consumers.
“People living in the five rings of Beijing wouldn’t understand our purpose. The new consumer economy isn’t about giving Shanghainese the life of Parisians. It’s about providing paper towels and good fruit to people in Anhui province.” — Colin Huang
Pinduoduo has maintained a very capital light model (e.g. only US$0.5b in invested capital for 2024 and limited capex). This is because the primary business outsources the more capital-intensive areas. The newer business lines are slightly more capital intensive given Pinduoduo manages parts of the delivery and warehousing. Huang in his 2021 resignation letter said, “Pinduoduo has transformed from a pure asset-light third-party model to becoming more asset-heavy, with new investments in warehouses, agriculture-focused logistics, and upstream sources of agriculture products.” However, this has had a limited impact overall for the business to date.
Historically, we were sceptical of Pinduoduo’s market entry with a negative view on the sustainability of its lower prices and aggressive marketing spend to buy growth. We were wrong. As it turns out, the company had exceptional execution and it is now a fully scaled business with similar incumbent advantages to Taobao. It is a remarkable feat as prior to its rise, the strength of the incumbent platforms should have enabled them to rebuff Pinduoduo’s entry. Huang and the management team saw an under-served segment of the Chinese population and a value proposition that wasn’t being offered adequately by the incumbents. Pinduoduo also pioneered the team-purchase model, which enabled greater discounts for group orders and incentivised word-of-mouth customer acquisition, enhanced by smart use of social acquisition channels such as WeChat (at the time unavailable to Alibaba given competitive exclusion from Tencent). Meanwhile, Alibaba had poor execution but was also less able to compete directly without destroying its own margins and cash flow (discussed more below). China’s economic hardship over the last 3 years also had a role to play, as it meant a shift towards lower-priced items just as Pinduoduo came to scale.