10 May, 2021
We can’t look past the move in commodities. It’s broad to say the least.
Recently we’ve seen iron ore, tin and copper rise to all-time highs. Even corn and soybeans are trading close to decade highs.
There are some shorter-term cyclical forces behind these moves – reopening, demand from China and economic stimulus. But longer-term structural cycles are also underway.
Copper is of particular interest to us.
Over the weekend the metal hit a historical high of $US10,440 per tonne, breaking through its previous all-time high of $10,190 set in 2011 during the post-GFC commodities boom.
We believe copper today could be entering a much more significant structural price cycle.
The copper price is not only benefiting from the rebound in economic activity, it’s a key commodity for decarbonisation. EVs require up to 4x more copper as the powertrain is electrified and the opportunity in renewables is even greater. 8 – 12x more copper is required (on a per gigawatt basis) as power grids are redesigned, strengthened and connected to wind and solar.
This is something we are well positioned for. Within the materials holdings in the APL portfolio, we have exposure to one of the fastest growing copper assets amongst the global majors.
…Meanwhile momentum in tech is swinging
We want to bring your attention to what we’ll call a “peak earnings sell off”. As we work our way through reporting season it’s a phenomenon that has stood out to us.
To put it simply, we’re seeing some big-name tech stocks report very strong earnings – in many cases delivering record results and beating expectations – yet their shares have sold off.
Why? They’re selling off from eye-watering valuations because of lower guidance.
COVID has been a once-off shot in the arm for many digital businesses and we think investors got too excited.
Fast forward a year, and now the market is becoming uncertain about growth rates in a ‘normal’ world.
Take Zoom for example. At the height of COVID lockdowns in 2020, Zoom was reporting revenue growth of 70% – 100% per quarter (on a sequential basis). This slowed to mid-high teens at the back end of last year and recently the company guided revenue growth will fall further to around 10% next quarter. The stock is down almost 20% since these results.
Pinterest is another stay-at-home beneficiary that recently told the market its user growth in the US could be flat moving forward. It’s also down around 20% since reporting.
Then there’s Netflix. It sold off after its Q1 results revealed new subscribers are materially slowing. It reported 4 million new subscribers in the quarter to March 2021 (missing guidance of 6 million). This compares to 16 million in the quarter to March 2020. The company also said new subscribers may fall to 1 million in the quarter to June 2021 (versus 10 million in the quarter to June 2020). Engagement is naturally falling as social restrictions ease.
There are many more examples of the peak earnings sell off that’s gripping tech stocks more broadly. Within the tech sector we are cognisant that disruption is real, but not all companies are genuine disruptors.
Our job as a pragmatic value manager is to look beyond the “concept” stocks – those given a free pass from COVID.
We want to gain exposure to long-term structural growth trends where growth rates are sustainable in a reopened environment.
The backdrop today also highlights the importance of paying the right price for growth. Those willing to pay any price for growth put their capital at risk.
…Speaking of earnings
Cryptocurrencies aren’t our area of expertise, so we don’t spend time on them. However, we love exploring company reports and thought the Bitcoin bonanza within Tesla’s financials was too intriguing not to share.
Tesla’s Q1 2021 revenues were in line with estimates, but all the $594m of Tesla’s reported Q1 EBIT came from credit sales ($518m) – that is, selling carbon certificates to other automakers that need to reduce their CO2 emission profile – and Bitcoin sale profits ($101m).
Stock in focus
Facebook is a great example of a tech company that can continue to grow in a normalised world. Online advertising grows with economic activity. It’s not a surprise to us that Facebook continues to take market share in online ads given the intensity of user engagement. Retail consumption is increasingly influenced by what we see on social media, and we are excited by the opportunities in Facebook’s massive ecosystem.
Facebook Shopping was launched only around a year ago and it already has over 1 million merchants and 250 million users. To put that into context, Amazon Prime has 200 million members worldwide. Although spend per customer is a fraction of Amazon, this growth shows the potential for Facebook to cross sell e-commerce to their 3 billion users. As an advertising platform, Facebook is in a fairly powerful position – attractive for large and small businesses alike, and across various retail segments.
For this, we’re only paying around 20x earnings. An embodiment of pragmatic value in tech.