-Lachlan Mackay

 

We have just been through reporting season where investors try to digest a torrent of information that could impact share prices in the short-term. But in today’s age of ubiquitous real-time information, it is almost impossible to develop a sustainable edge via short-term earnings analysis and stock picking.

At Montaka, while we monitor quarterly earnings results, we believe it is better to take a longer-term approach. We look ‘under the hood’ of results for datapoints and developments that help us better understand the next five to ten years. We then apply those long-term insights to our portfolio.

 

There are 3 specific long-term insights we seek during earnings season:

 

1. Insights that challenge our portfolio stock theses

Our investments are informed by a core thesis, such as the digital transformation of a business, or the structural expansion of alternative asset investment management. Each of these theses are underpinned by a few key drivers, with multiple scenarios that could play out. During earnings seasons we constantly seek to build confidence in, expand upon, or disprove our theses and investment assumptions.

 

2. Industry developments

Secondly, we seek deep insights into long-term industry developments. The economy is increasingly interconnected and developments in one market are usually felt across a wide range of industries. In the past weeks we have studied reports from dozens of sectors – businesses ranging from Shopify to Illumina to MGM. We have garnered hundreds of insights on the state of the markets our investments – and potential investments – operate in, across capital markets, labour markets, supply chains and customers. These insights help update our views on long-term drivers of structural change and are shared and debated amongst the investment team.

 

3. New ideas

Thirdly, we seek new investment ideas. Personally, reading widely to identify new opportunities is my favourite part of reporting season. Many of our best ideas have come from applying an observed structural trend or business model from one sector or geography to another sector or region. Many companies around the world, for example, comment that they are seeking to replicate REA Group’s Australian success in building the dominant national real estate marketplace.

 

5 BIG PICTURE TRENDS FROM EARNINGS SEASON

So based on these three insight areas, we identified five major trends that stood out in the recent reporting season.

 

1. Massive upside in cloud computing

Firstly, it helped confirm our non-consensus long-term view that investors underappreciate the sheer scale of cloud computing demand. Microsoft CEO Satya Nadella reiterated his view that tech spend is only 5% of GDP today and should double in the next 10 years, a process accelerated by the pandemic. Distributed cloud infrastructure – which allows you to run public cloud infrastructure in multiple geographic locations — is needed by all global businesses to modernise existing applications. This has been clear and growing strongly for years and yet is still only 20% penetrated today.

Moreover, ‘future’ cloud applications such as AI and machine learning are becoming increasingly necessary today as automation becomes more commoditised. We expect the coming decade of strong growth in demand for cloud infrastructure will benefit Microsoft, Amazon and Google far beyond what the market expects.

 

2. Established companies successfully adapting to digital disruption

Secondly, established companies are successfully undergoing digital transformation, a process accelerated by the pandemic. Disney is a great example. It operates in a variety of segments experiencing varying degrees of disruption. Disney’s results continue to show it has adapted more aggressively than others. They have restructured their core business and internal incentive structure to lead with direct-to-consumer (DTC) streaming content and distribution.

But Disney’s parks, cruises, cable television, cinema, merchandise and other businesses remain vital to the Disney flywheel. Disney announced a data-driven personalised digital assistant that will connect guests’ content preferences with real-time park attractions’ usage, optimising both guests’ time and the park infrastructure, and connecting their digital and physical worlds through data.

 

3. ‘Work from anywhere’ is entrenched

Companies also showed that remote work is here to stay. Businesses such as Shopify have adopted remote work permanently and others have pushed back their return to office due to the spread of new variants.

Realising they are no longer tied to working in one city, professionals flocked to Airbnb during the pandemic to take advantage of their newfound freedom. Airbnb built hundreds of new tools for hosts to accommodate this demand and are now seeing record listings as economies reopen. Meanwhile, long-term stays (28+ days) continue to be their fastest-growing segment and 40% of searches now opt for flexible dates or locations. Airbnb are addressing a previously unforeseen use-case, and utilising guests’ flexibility to optimise their inventory.

 

4. Creator economy generating more noise

The ‘creator economy’ is all about digital content creators connecting directly with their fans and monetising them individually. We are in the very early stages of a process that will likely utilise blockchain’s tokenised incentive structure. But already Facebook – through Instagram and Shops – and Spotify are developing products and services to cater to the creator economy.

Spotify has broken down barriers to music fans’ discovery of artists anywhere in the world, and artists’ discovery of their global fans. The natural next step is to allow fans to invest directly in their favourite artists, many of which are drastically underpaid due to labels’ rights ownership, and for artists to provide more personalised experiences to their biggest fans.

We are seeing early evidence of artists navigating around labels to connect directly with fans, such as digital concerts performed through Spotify, and sales of non-fungible tokens (NFTs) – unique ownership of digital assets – that come with special fan privileges such as direct artist contact or VIP experiences at concerts and festivals.

These insights are not captured in Spotify’s quarterly numbers that drive short-term price movements. But there is a wealth of information buried deeper that informs our thesis.

 

5. Alternative asset investments boom

Finally, after four decades of success as a pioneer in private equity and alternative asset management, Blackstone co-founder and CEO Stephen Schwartzman announced that the industry has reached a multi-decade, secular inflection point. Blackstone, already a world-leader with US$700 billion of assets, expects to triple its total addressable market with expansion into retail and insurance channels.

In our other Monocle article this month, Amit takes a deep dive into Blackstone’s future. He explains why Blackstone, along with KKR and Carlyle, can expect to receive outsized share of this emerging US$170 trillion opportunity.

 

INTELLECTUAL COMPOUNDING

It is important to note that nearly all the data we collect requires no change to our portfolio. It simply helps us update our mental models.

Montaka is a team of generalists seeking intellectual compounding.

Intellectual compounding is derived from the exponential growth we see in the hyper-connected networks we invest in and the compound growth of successful long-term investments. Our collective knowledge forms from a network of analysis.

Each analyst shares insights with the team, building upon (and debating between) multiple perspectives such that our insights are always compounding. This is only possible as a team of generalists, where we can generate richer insights collectively than by specialising alone.
We cover not just the sectors directly impacting our portfolio but go deep on a much wider universe of names.

Earnings season is an exciting time for Montaka. Not because we observe the market react to short-term profit results. But because it allows us to identify the crucial long-term insights and datapoints that tell us what the next five or ten years look like, and ultimately helps us compound our knowledge, and of course our portfolio.

 

Lachlan Mackay is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.