Achievement Unlocked: hidden discounts in digital tech

June 2020 - Joe Bauernfreund

Many investors crave greater exposure to tech – and for good reason.

The seemingly endless rallies and sky-rocketing valuations are many investors’ panacea. But as the tech bubble continues to grow – seemingly unphased by the Covid-19 crisis – finding a decent price for high quality tech stocks is exceptionally difficult…

But not impossible.

A golden age

Forget the Dot Com bubble. We are in a golden age of technology companies. Forbes annual ranking of the top 2000 listed companies includes over 150 technology companies. Scroll down the rankings and you will see companies across the digital universe: from e-commerce and chipmakers, to cloud, information storage and AI. Many of them are household names. Think Amazon, Apple, Microsoft, IBM, Intel, Samsung, Facebook…

Some of the rising stars such as Slack, Zoom, Alibaba, Tencent, Alphabet or Lyft are gaining media attention and subsequent investment interest from institutions and investors alike.

If we are confident that we have picked the next Apple then another challenge emerges. What is a fair price to pay?

The challenge for investors is to determine which of these companies are here to stay. The growing list of fallen tech giants (Nokia, Yahoo, Kodak, Xerox, Blackberry) is a testament to the challenge posed to today’s market leaders.

So, if we are confident that we have picked the next Apple then another challenge emerges. What is a fair price to pay?

Enter holding-companies, and in particular…

Enter Prosus

A strategy employed at Asset Value Investors (AVI) is to buy into high-quality fast-growing technology companies through a listed holding company. Listed companies owning significant shareholdings in blue-chip technology companies is common. A prime example is Prosus – a Dutch listed technology focused company.

Prosus’s major asset is its 31% holding in Tencent, the HK listed media and services company, accounting for 85% of net asset value (NAV). In addition to this, they hold an array of market leading digital assets such as classifieds, e-payments and food delivery platforms.

Prosus are well placed to benefit from the accelerating secular shift to online. They are leaders in many of the markets they invest in. They hold over €4bln of net cash on their balance sheet and are in a strong position to assert their dominance in many markets with bolt on acquisitions.

The Tencent Factor

Image by Nintendo

Tencent is Prosus’ crown jewel. A Chinese media and social services behemoth owning WeChat, the world’s biggest social network with over 1 billion active users. The world’s largest online games developer with titles such as League of Legends, Fortnite and Call of Duty Mobile. China’s second largest mobile payment provider and third largest advertising platform. Yes, these are all owned by the same company.

With these far-reaching tendrils spanning the Chinese digital universe, we believe at a multiple of c. 26x, it is reasonably priced for the growth prospects. Growth seen in games titles such as ‘Honor of Kings’ and ‘Peacekeeper Elite’ has reinforced this, in addition to their strongest pipeline of games since 2008 with the release of DnF Mobile, LoL Mobile and Valorant. Year on year sales of these game titles jumped 31% over the recent holiday period and during the COVID19 global lockdown.

Prosus’ Performance

League of Legends Gaming Stadium

Prosus’ high returns are not solely due to Tencent, as some market analysts have suggested. Whilst this single investment did provide stellar returns, such a claim is unfair. Their average IRR excluding Tencent comes in at 19% (24% including Tencent).

Prosus currently trades on a discount to net asset value (NAV) of 29% . The NAV side of the equation shows great prospects for growth, from their unlisted assets and holding in Tencent which is primed to benefit from greater demand for home entertainment services, improving ad revenue and strong pipeline of mobile games. For a bonus, further growth prospects are in the pipeline through Prosus’s other unlisted technology assets.

By investing in Prosus we can buy into a high-quality, fast-growing technology company like Tencent at a significant hidden discount.

Find out more about our investment process.