SaltLight Capital Management, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A portfolio return of 14.1% was recorded by the fund for the second half of 2021, while its benchmark by comparison returned 12.3% for the same period. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of SaltLight Capital Management, the fund mentioned Facebook, Inc. (NASDAQ: FB), and discussed its stance on the firm. Facebook, Inc. is a Menlo Park, California-based social networking service company, that currently has a $1.01 trillion market capitalization. FB delivered a 31.40% return since the beginning of the year, extending its 12-month returns to 35.30%. The stock closed at $358.92 per share on August 04, 2021.
Here is what SaltLight Capital Management has to say about Facebook, Inc. in its Q2 2021 investor letter:
“At SaltLight, we’re giddy with excitement when we uncover businesses that the market has not “discovered” yet. Our composure also weakens when we find a business that is ‘hiding in plain sight’ and market participants are underestimating the duration of a moat or under-appreciating a strategic shift into a new business (our heart skipped a beat with Transaction Capital’s recent acquisition of WeBuyCars).
Whilst an investment in Facebook is unlikely to win awards for being original, we must remind ourselves that our job is to find durable and indispensable businesses that have great odds in creating long term returns for investors who trust us with their hard-earned capital. We cannot think of a better company than Facebook.
Our incongruous path to working on Facebook came after exploring Southeast Asian and Japanese B2C companies (a story for another day). In discussions with these businesses, the common challenge confronting them is acquiring new customers (particularly during the COVID period). Facebook and Google kept coming up as the most effective way for targeting new customers. This spicy insight was the indispensability that we were looking for.
The share price was unreconcilable to the implied value over the next 3–5 years and, optionality that exists with new initiatives. The decision to deploy capital became rather easy.
Critics will argue that Facebook has a deep market penetration already (almost half the world’s population of 3.5bn monthly active users across Facebook, Instagram and WhatsApp) and an obvious question to ask is – how much juice is left?
Our view is that the growth of users is less important; monetising the strong network effects across its platforms and the balancing act of capturing value vs. facilitating value is the more important question for future returns.
Our broad thesis rests on (1) moving down the transaction stack, (2) monetising WhatsApp, (3) enhancing discovery and (4) the optionality around the “next consumer platform”.
Regulatory challenges will always be a potential headwind. The impact of Apple’s changes to IOS (App Tracking Transparency) is still unknown. However, the question to also ask is: what’s in the price. Our letter is on what we think is not in the price.
The Advertising Engine
First, it is helpful to give a brief overview of the current profit engine. Digital advertising has essentially democratised ad buying – from blue chips right down to SMEs and increased the surface area of targeting high-propensity-to-buy customers. The true genius of the online advertising model is:
• Long-tail of potential customers: The potential ad inventory is so much larger (e.g., women in their 20s within a 10km radius who are away from home)
than the inventory from a print magazine or TV commercial slot (e.g. the ten LSM categories)• Quantitative measurement of ROI: Advertisers can measure the performance of ad spend at a very granular level vs. the ‘spend and pray’ approach to traditional advertising. Facebook makes it simple and affordable to reach customers that a business truly wants. Much of Facebook’s revenue comes from direct response advertising such as joining a list, buying a product, visiting a store, or installing an app.
Their advertising distribution base (from blue-chip companies to SMEs) combined with advanced algorithms fed with data from 3.5 bn users creates an incredibly durable moat. This 2020 survey2 demonstrates how effective social commerce on Facebook is compared to other platforms. Despite its rapid adoption, TikTok still trails behind Facebook platforms considerably.
Readers will recall that, across its platforms, Facebook shows a targeted ad (figure 1 show that their ad targeting is impeccably tuned to our interests), and the user clicks the ad to which they jump onto another site.
Once on the seller’s site, the user’s experience varies greatly and is highly dependent on the seller’s technical sophistication. For SME’s, this is not their
core competence. And for buyers, painfully, they need to keep entering their credit card details for each new website (with the associated risk of fraud with each new entry)Over the last year, management has been strategically developing products to move up (discovery) and down (checkout and payments) the eCommerce stack.
In 2020, Instagram shops were launched where a user can purchase directly via an Instagram account. The only part of the transaction left for the merchant is shipping.
These features have taken off considerably in one year. As of June 2021, they already had 300 million monthly Shops visitors and over 1.2 million monthly active Shops.
Monetising WhatsApp
Our thesis over the next few years is that WhatsApp will be increasingly monetised (Zuckerberg is playing the long game after buying it back in 2014!) and will be an integral part of the Facebook/Instagram shopping architecture.
At this stage, WhatsApp is virtually unmonetised and therefore is not meaningfully appearing in the income statement (and valuation multiples).
Since we have invested, the pace of monetisation of WhatsApp is gaining steam.
• Consumer to business interactions over chat.
• Payments from WhatsApp are already available in Brazil and India.
• Shopping directly on WhatsAppMonetisation here is likely to still be predominantly ad revenue, however, management is disclosing a 5% take rate on GMV4 on its Facebook marketplace and shops products. This is likely to carry across to the WhatsApp store.”
Photo by Alexander Shatov on Unsplash
Based on our calculations, Facebook, Inc. (NASDAQ: FB) tops our list of the 30 Most Popular Stocks Among Hedge Funds. FB was in 257 hedge fund portfolios at the end of the first quarter of 2021, compared to 242 funds in the fourth quarter of 2020. Facebook, Inc. (NASDAQ: FB) delivered a 12.16% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.
Disclosure: None. This article is originally published at Insider Monkey.
