David Kim’s Forage Capital has sent a letter to partners reviewing the fund’s third-quarter performance and analyzed the current and future prospects of a number of tech companies as well as one of its new picks.
The fund has returned -0.6% between its launch on July 14, 2016 and the end of September, underperforming the S&P 500’s 0.9% gain, according to the letter. The main detractors behind the fund’s lagging returns were AMERCO (NASDAQ:UHAL) and Oaktree Capital Group LLC (NYSE:OAK), while the biggest contributors were MRC Global Inc (NYSE:MRC) and Alphabet Inc (NASDAQ:GOOG). In this article, we will take a closer look at David Kim’s view on three tech stocks and will see why the investor likes Amerco, despite the stock’s weak performance.
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David Kim said that he held shares of Alphabet Inc. (NASDAQ:GOOG) for several weeks and sold them at a small gain, which he attributed ” entirely to luck”. The investor explained Google’s ecosystem in a layered diagram in the letter, analogizing the company’s product hierarchy with Ozymandias, a literary sonnet often used for something that is bound for destruction.
Kim thinks the massive shift towards mobile is not boding well for Google. Around 65% of the media time is spent on mobile, out of which 90% is spent on self-contained apps, leaving a very scant time for Google’s services such as Google Chrome and YouTube. Users now start their online shopping directly in Amazon.com, Inc. (NASDAQ:AMZN)’s mobile app due to its in-app search feature. This has damaged Google because previously customers used to search products of their choice on Google and then land Amazon’s shopping pages. Kim said Google’s mobile ad revenue is destined to hit limits as users are aversive to mobile ads, which are, according to Kim, being heavily loaded by Google in mobile search results.
Facebook Inc (NASDAQ:FB) is another major competitor for Google. Online travel agents like Priceline and Expedia are now actively working with Facebook for targeted marketing and dynamic ads and Kim considers Facebook’s ad campaigns are much more useful in generating click-throughs, a metric important for generating revenue in online businesses, as compared to Google’s AdWords campaigns. Google also faces challenges in the Enterprise domain where Microsoft and Amazon have well-structured infrastructure and experience for growth.
According to David Kim, modern internet and technology industry is following the “Schumpeterian Cycle”, according to which once a key player in the industry eventually goes into extinction, giving rise to a new one, and the cycle goes on. Kim thinks that companies like Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), and Alphabet Inc. (NASDAQ:GOOG) are currently in a fateful struggle of winning all the aspects of the modern tech industry – social media, search, eCommerce, messaging. This contest, according to Kim, is based on winner-takes-it-all rule.
Google triumphed over the internet ecosystem due to its unrivaled access to user data, processing power and expansion capabilities. But over the past few years, the rise of machine learning, robust graphical processing capabilities, AI and sensor-based mobile devices have eclipsed Google’s superiority.
On the next page, we will discuss why David Kim bought Amerco’s stock.