Este post não está disponível em português.
Beeneet Kothari runs US$ 1 billion in technology stocks at Tekne Capital Management in New York.
The Indian-born, India-raised investor went to college in the US and got his start working for Stanley Druckenmiller at Duquesne Capital.
He joined Duquesne as an analyst in 2005 and three years later became a portfolio manager with a US$ 100 million book.
When the book grew to US$ 300 million, he left the firm to launch his own fund, which was seeded by the Rothschild family.
Tekne, which was launched in September 2012, runs a long-short fund with a concentrated portfolio of 8 to 12 positions.
Brazil Journal caught up with Beeneet by Zoom.
Do you think the US Congress will try to break up the Big Tech companies?
No. I think their goals can be achieved without a breakup. And the goals that they have for each of the companies are a little different. For example, at Apple the real problem is not with the devices, but with the app store. With Amazon, 80% of the value is in AWS, and they have no problem with AWS, they have problem with retail, but not even with retail but with the third-party platform. In other words, by the time lawyers get into this… you know, if you think about this like a typical case, and they are convicted, they are guilty… well, before that they will get to their lawyers and they will say: ‘look, what do you really want?’… With Google, the problem is different than it is with Facebook. So, a breakup is a blunt instrument, and the only reason they will go there is if these companies, or the government, decide they have zero interest in negotiating.
Unlike with Microsoft, unlike with Standard Oil, unlike with AT&T, consumers like these companies. By the way, I cannot imagine covid-19 without Amazon, these companies saved the economy. All of them. Their products are free for the most part, these people are respected, so I don’t think we are going to use the blunt instrument, because I don’t think these people are enemies in the way Standard Oil was, in the way AT&T and Microsoft were. There is going to be a settlement, and the settlement is gonna be so nuanced that you and I won’t even notice the difference.
And one last thing, let’s not forget that John Rockefeller became wealthier after the breakup of Standard Oil than he was before. Because when you break these things up, they are actually worth a lot more than when they were together.
Do you think some of these companies should spin off parts of their business so that the sum of the parts is bigger than the whole right now?
No. Because they are run by the founders and it is a little like kicking one of your kids out of your house when they are not ready to go. Mark Zuckerberg created Facebook. Jeff Bezos created both parts of Amazon. Larry and Sergey are still there behind the scenes These founders and CEOs are not detached from these companies. This isn’t a corporate executive, some McKinsey consultant just running the company like Ebay. These companies are babies. So, I don’t think they should spin them off from a business perspective, and I think from a personal perspective — which cannot be underestimated — they are unlikely to do it.
From a business perspective, you think they should not do it because there are synergies in keeping everything under the same roof?
It’s hard to talk about all of them like it’s a monolith, but take Facebook: absolutely. Instagram, Facebook, Whatsapp — they are all advertising businesses. It’s like a media company that owns CBS, ESPN and Disney. Yeah, they are different, but at the end of the day you have slots during the day and you are selling advertising against those slots.
Let’s talk about a stock that you really like: Alphabet. Youtube is worth I don’t know how much money. If it were a separate company, if they were to spin off Youtube, it would add value to Alphabet or would it detract value?
I am not trying to evade your question, but it really matters who is running these companies and then the respective decisions. In other words, take Ebay and PayPal: when PayPal was inside Ebay, it struggled. Ebay languished because the people that were running it were not very good. You spin them off and Ebay is still struggling while PayPal is a home run because the people running it are really good.
If you spin off Youtube and for some reason you don’t get a talented person to run it, there is no guarantee of the outcome. There is no destiny here. It’s not only a business: you are not selling toothpaste, you are not done growing. So, strategy matters. Youtube has competition, Netflix is a real competitor. I think these companies should be run by the best people and sometimes, like in Amazon’s case, ‘the best people’ is the one person who is running it today. I want Jeff Bezos to run both parts of the business.
Will a Biden administration be necessarily bad for Big Techs?
No. I think covid-19 is a game changer. I think there is a change, we are in a golden era for businesses. I think economies around the world are desperate for job creation, desperate for investments, desperate for more technology, not less. Desperate for healthcare technology, ecommerce, chat.
I think these tech companies represent a way out of this crisis, this economic recession, so I think there is a chance that no matter who is in the White House these companies are given a little bit more latitude than they may have been without covid. So now the natural question is: what if we didn’t had covid? Who knows, who cares? Covid is here, economies are upside down and the only glimmer of hope we have anywhere in the world is tech. They hire people, they create wealth, they allow for consumers to achieve their daily objectives, and all of that.
Don’t you think the propensity to regulate will be higher in a Democratic administration vis-à-vis a Republican one?
I think even that is too simplistic. Look what is happening right now. Forget the fact that Congress called them to testify… the Republican White House’s own DOJ is suing Google! And what you realize is that Google did quite well under Barack Obama. Eric Schmidt was always in the White House. So the lesson is not whether it’s Blue or Red in the White House, the lesson is: are you a lobbyist for the right people in the White House? In other words, Google lobbied and stayed out of trouble. Facebook and these companies were the ‘enemies’ of this administration so they got in trouble. I think it is too simplistic to view this as D or R [Democrat or Republican].
Alphabet is now reporting the revenue of each business division: search, cloud and Youtube. What is the competitive advantage of Google in the cloud business compared with Microsoft and Amazon, which have been in that market much longer?
None. I think it’s easier to name the disadvantages than it is to name the advantages. The biggest disadvantage [to Google] is that Microsoft customers for the last 40 years had been enterprises. Google has no relationship with enterprises. When you go to sell something that is important and critical and sensitive, you gotta be able to call the right person at the company and that person needs to call you back because there are 30 people that want his budget, that wants his wallet. The guy calling from Google… you have never heard of him before, you don’t see him at trade shows. They don’t have any advantages.
Should they be in this business?
No. I don’t think it’s a good use of their capital. One of the reasons, by the way, that these companies are in trouble, is because the combined tech companies have half a trillion dollars in cash on their balance sheet. It’s burning a hole in their pockets. So they are going out and spending it.
Microsoft, Amazon… 80% of the value of these companies is because they are on the cloud. And Google is hitting there and saying: ‘well, if that’s where the money is, let’s get it’.
But just because it’s a big opportunity it doesn’t mean you should be there. This is a mistake that Microsoft used to make. They used to see Google making all of this money in search, and they used to put up a search engine. Google, in my opinion, is making an old, classic mistake. And by the way, there is a simple reason why, which is the fact that they never found a second horse. Search is 99% of profits and for as long as they don’t find a second horse they are going to keep doing silly things.
But in the grand scheme of things, if they are spending US$ 5 billion, US$ 10 billion doing cloud, it’s a trillion dollar company so it doesn’t really matter. The good outweighs the bad.
The boycott to Facebook: is this just a blip in the story or a turning point?
They have about 16 million customers [advertisers] globally. By the way, the biggest mistake people make on Facebook is to focus on the users, whether the number is 2 billion, 2.1, 2.2 billion… they overanalyze that number. These users pay zero dollars to Facebook. The right number is the number of customers spending money on Facebook, and that number is growing. It’s only a quarter of the number of customers Google has. So it can grow 4 times from here.
So if they lose a Disney, if they lose the top 10 spenders, won’t that make a difference?
Where are they gonna go? I don’t think they even went anywhere. Youtube and Facebook are very different products. They don’t have where to go. Disney has nowhere to go, and if Disney decides to run away, they are going to lose market share because Facebook is not going to lose market share.
Your largest position (20% of the portfolio) is GDS, a Chinese company that owns data center real estate. What do you see as upside for that company?
GDS is the leading data center company in the China cloud market. Data centers at their core are real estate assets. Real estate is difficult to expand for two reasons in China. Number one: if you are going to own a good real estate asset, it has to be in a major city. No one wants a data center near the Amazon rainforest. They want in the middle of São Paulo. Well, the middle of São Paulo is crowded. There is no space. Data center capacity is very hard to build, so if you are right there, you can charge a lot.
Number two: when you buy real estate as a data center to get Microsoft, Amazon, Facebook as a customer, you have to guarantee ten years of operation. So you need a 10-year contract for water. You need a 10-year electricity contract so there are no brownouts or blackouts. Here is the problem: when you go to the local utility, you have all this capacity and resources that are finite, and in return you create about 20 jobs. A typical real estate project like a hotel creates 600 jobs. So you are not getting this license. That’s the supply side. The demand side of data centers is exploding.
Tell us about your two Brazilian positions: PagSeguro and Arco Educação.
We have been investors in both companies since their IPOs. We actually hosted PagSeguro CEO [Dutra] last week, we do those private events for investors where we bring one of our portfolio companies’ CEO. We love these businesses. We think both are at a very, very early stage. Most of Brazil is still using cash. Most Brazilians are still not fully educating themselves online.
The most important thing about technology investing — whether it’s Brazil or China — is to not get too caught up in the quarterly results, in the day to day. You take a big step back and PagSeguro is probably a monopoly in what it does, which is micro merchants. Not small businesses, but micro merchants: the guy in Ipanema selling coconut, the hairdresser. You got a monopoly business, with categories growing, they make money, are run by really good people and are expanding. PagBank is a game charger. They are following the Square playbook almost exactly, and Square has been a home run. Arco is doing quite well also. They are one of the only businesses in their market growing at a 25-30% rate, with margins that are good, and they are run by really good, long-term thinkers.
Tesla: do you have a view?
Yes. I think it’s going to be a trillion-dollar company. I think the guy running it is the closest thing to Thomas Edison that we will ever have. Tesla is going after one of the biggest markets in the world and he is the smallest player, with no competition. I think he has a ten-year head start. I do have a view and it’s very very positive.
You don’t see BMW as competition to Tesla?
I don’t see any of them. I just bought a Tesla and I know this is an old analogy but it is correct: the feeling of driving a Tesla is almost identical to the feeling of owning an iPhone for the first time ten years ago. It feels a little funny if you were used to the Blackberry. But 10 days after doing it, it starts clicking. 20 days later, you can’t imagine going back.
It’s not perfect, and that’s the reason to be bullish. Because the iPhone was not perfect and what it created was a 10-year innovation cycle. The Blackberry was perfect — so it had nowhere to improve. It had nowhere to go but down. The iPhone had nowhere to go but up. That’s how it feels today. I have had a Mercedes, an Audi, a BMW, a Porsche, and it’s all the same, they are not really changing. But Tesla, there are a million things they can do to make it better.
Tell us a little bit about your investment approach of being concentrated in 10 names instead of having a big portfolio.
I think concentracion is the only strategy that works. My old boss used to say: ‘you put all of your eggs in one basket and watch that basket really close’. I think that’s the right strategy. It forces me to be focused, it prevents me from being distracted. In the evenings and weekends I read about business. But I know that I can only own 10 companies, and it forces me to be focused. If you don’t have a limit, there is always something interesting. Because what happens with investments in any given time is that one of your companies becomes boring and maybe they are going through a tough time. It’s too easy to sell one of those things and buy the new ‘shiny object’. There’s always a new ‘shiny object’. And if you become the type of investor that is always chasing the ‘shiny object’ you have nothing! What we have found is that we don’t wanna become people that are not curious, but we don’t also wanna become just chasers. We own 10 companies and we try to make them globally diversified. So we are not a Brazil fund, we are not a China fund, we are not a data center fund. We own one data center company. We wanna be diversified but concentrated, so that we are uncorrelated inside the portfolio. We wanna be mentally focused.
What’s the downside?
People always ask me about the downside about being concentrated and is that you gotta get things right, you can’t really afford mistakes. No one asks me about the upside. And the upside is this: the bar for company number 11 in the portfolio is set so high… If you own 30 stocks, there is no real bar for number 31 or 32. So, because our bar is set so high, we become really picky and that’s a wonderful psychological place to be.
Did you self impose the number 10? Or it could be 11, 12?
It’s 8 to 12.
The Nasdaq is at an all-time high. I think all those debates we see on CNBC about whether the market is overvalued or not… it’s too simplistic. Still, is there anything you can say about market multiples?
I think you don’t wanna be the person that concludes that technology is overvalued. I think that is an enormous mistake. I think you don’t wanna be the person that says: ‘there was a 5-year bull market and we are now in year five’. Technology is changing our world, it’s changing how businesses operate, it’s changing how consumers interact with businesses, it’s changing governments. This is a 50-, 60-, 70-year run. Airplanes were invented 100 years ago and they changed the economy for 100 years. That’s what really powerful innovation does. It doesn’t change things for a few years. We are not done yet.
Does that mean the market will be up next month? I have no idea. Maybe. Maybe the trend is so powerful that it will be up next month. But that’s not the point. The point is you don’t want to get caught up in thinking that technology was a trade. I think it’s a revolution and there is no other word for it. It’s a little bit like calling the end of democracy or something like that. It’s too big of a trend, it’s too powerful.
And by the way, to your question: are stocks expensive? I don’t even know what that really means. If you look at valuation multiples it’s silly. That’s not how stocks work. Warren Buffett has this great saying… some guy said to him: “I found a stock, I really liked it, I wanna buy, but it’s up a lot. What should I do?” And Buffett had the perfect answer: “Buy. Unless it’s offensively priced, buy it”. And I would say that the market is not offensively priced. It’s higher today than yesterday? Yes, but who cares? What does that mean? Nothing! The markets are not offensively priced. Remember: bonds are offensively priced. A 1% interest rate is like 99 times earnings… When you buy a bond at a negative rate of return, that’s offensive. Stocks are 20 times, 25 times earnings. Wherever they are.