7 highly disruptive stocks with Alex Pollak | ASX Week

HOSTS Alec Renehan & Bryce Leske|1 June, 2021

Brought to you by Australian Securities Exchange (ASX)

Meet your hosts

  • Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

This week is all about the ASX Investor Day and this episode is the second of our special mini-series. If you missed the live sessions held around the country over the past month, then you’re in luck! Equity Mates have partnered with the ASX to bring you some of the best sessions and experts from the conference. The theme of this episode is ‘Investing In Global Markets’ and we’re joined by CIO of Loftus Peak, Alex Pollak. Alex has 25 years experience specialising in investing in disruptive business models, and is now a Director of Loftus Peak and heads one of the best-performing teams in disruptive investment in Australia.

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Bryce Leske: [00:01:48] Welcome to another episode of Equity Makes a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status, our aim is to help break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my equity buddy Ren. How are you going? [00:02:02][14.4]

Alec Renehan: [00:02:03] I'm very good, Brize. Very excited for this episode. We're going to be speaking to an expert in covering a lot of stocks that are of particular interest to the equity markets community. [00:02:13][9.8]

Bryce Leske: [00:02:13] Absolutely. This week is all about the ASX Investor Day. In case you missed the live sessions held around parts of the country over the past month, we've partnered with the ASX to bring you some of the best sessions and experts from the conference. And today's theme is all about investing in global markets and disruption. And we are joined by the chief investment officer of Loftus Pache, Alex Pollak. Alex. Welcome. [00:02:36][23.0]

Alex Pollak: [00:02:37] Hello. Hey. [00:02:37][0.6]

Bryce Leske: [00:02:38] Alex has twenty five years experience specializing in investing in disruptive business models and is now director of Loftus Peak and heads up one of the best performing teams in disruptive investment in Australia. So we're going to go through a bit about Alex's investment framework and then really pick his brains on a number of stocks that are on his watch list or in his portfolio, which is pretty exciting. So let's get stuck in. [00:03:02][24.0]

Alec Renehan: [00:03:02] Yeah. Now, before we do, Alex, we do always like to start with the same question, and that is to hear the story of your first investment. We generally find there's a good story or a lesson that comes out of it. So to kick us off today, can you tell us the story of your first investment? [00:03:15][12.9]

Alex Pollak: [00:03:16] So my first property investment or my first stock market investment, [00:03:19][2.9]

Alec Renehan: [00:03:19] whatever the first one was. [00:03:20][0.8]

Alex Pollak: [00:03:21] first one was a rental property, which I bought in conjunction with my brother. And we made a bit of money out of it, actually, but it was property and it was my very first one. We bought it for, I don't know, 50 or 60 grand. I think we sold it for 100. No, that's right. [00:03:36][15.5]

Alec Renehan: [00:03:38] So start studying how old I am. You're starting your investment journey with property is something that people our age would love to be able to do. But it's it's hard those days. [00:03:47][9.8]

Bryce Leske: [00:03:48] Unbelievable. Well, let's get stuck into what you're doing at Loftus, Alex, and we'll start with your investment framework. How do you define, firstly, disruption when you're looking for investment opportunities? [00:04:00][11.8]

Alex Pollak: [00:04:01] So disruption is when everything that was, you know, went before is swept away. So a really simple example of this is thinking about all the companies that used to make camera bodies and cameras 30 years ago or tape decks. What happened to all those cameras and camera bodies and tape deck, you know, machines? And the answer was they were all, as it were, virtualised and stuck into software apart from the camera and the actual recording microphone itself. But that's a tiny component of the whole thing. All the software was vocalized and inserted into your know, your iPhone, your phone. Generally, innovation is something that, you know, we draw a line between innovation and disruption. Innovation is what car companies did and what most companies do for the last hundred years. They started off with a pretty, you know, clunky old car and they put in power brakes and power steering, et cetera, et cetera. But they were always basically run on oil, etc. What's happening now is that the energy cycle is being changed. It's one of our themes. And what's happening to cars is that cars, all of the cars that went before, which were just innovations, are being swept away under this new car architecture, which is battery and that's disruption. So disruption sweeps everything before it away, so to speak, and changes. So like I said, camera batteries, you know, internal combustion engines, that's so we invest in those companies. [00:05:24][83.4]

Alec Renehan: [00:05:26] So you mentioned that the changing energy cycle is one of your themes. And what are some of the other big disruption themes you're following at the moment? [00:05:32][6.4]

Alex Pollak: [00:05:33] So we have a few and we have since the very beginning of this company seven years ago, we referred to energy not as a fuel to be burned, but as a technology to be manipulated, if you know what I mean. Right. So for thousands of years, humans have burnt fuel, wood, et cetera, et cetera, and generated heat or petrol or, you know, et cetera, et cetera. Cooking implements its cooking fires. But energy doesn't have to be burnt as fuel. Energy can be harvested from the sun or the wind. And it's, as it were, infinite on that basis. And so it's not a you don't burn it up and use it and have to go and find some more. You simply use the technology to transform it from one source to another. That's energy is a technology, not a fuel. [00:06:21][48.8]

Bryce Leske: [00:06:22] So then what is the framework in a process that you take to find and analyze companies? You obviously identify what these major, I guess, areas of disruption are. How do you then find companies within that? [00:06:36][14.2]

Alex Pollak: [00:06:37] So energy is fuel. Is that's thematic, right? We've got five or six major somatics. The human gene and the genome are other thematics. Another thematic network because networks have their own particular economics and networks is what drives things like Amazon and eBay, etc., data is very, very important because we live in a world in which the transmission of data, the manipulation of data at great speed is increasingly something that we're even not. We don't even see it. It's so invisible, for example, when you do a Google search. So let me start again. There are 67000 Google searches a second. Well, 67 there are not enough people in the world to answer 67000 Google searches per second. You to do that. You need machine learning. You need particular kinds of systems and data transmission systems in order to answer those questions, you know, in whatever Google does. Point zero one for a second. You know, every time you get an email and it says down the bottom, yes, sure. It looks like a good idea. That's a piece of machine learning that's been sort of inserted in there. You don't even notice it every time you hop into an Uber and it recalculates a route from here to there because you change something. That's all machine learning when it sits there and says, oh, there's a traffic jam over there, you should go this way. That's a machine learning machine. Machine learning is everywhere around us, like the air itself right now. We just and we don't even see it. Right. But it's there and it requires very significant and specific tools to make it work. So data as data is another one. China is another thematic by dint of the fact that China is geopolitically significant and very large and at a point of maximum change, that's automatic. So those are the kind of energies we mentioned before. Those are the sorts. So you asked me how do we, you know, companies right now, first of all, we start with these thematics. So so we put the companies in those various boxes. The Matrix might be Apple, might be Google, might be Mukada, Libra might be Alibaba, might be Invidia, might be Qualcomm. And then we say, are they disruptive? Yes. So are these companies using new tools to execute business better? And the way we know they execute business better is they grow faster and they become worth quicker. So the stock price goes up. So that's the kind of soup to nuts idea about what it is that we do and a tiny bit of how we do it. But obviously, there's more detail behind that now. [00:09:26][169.1]

Alec Renehan: [00:09:26] So in these periods of big disruption, you have a lot of legacy companies that lose out, some that are able to disrupt themselves and adapt. And then among all the new companies that come on, you have some massive winners and you have a lot that has promise but doesn't pan out. And for beginner investors, it looks like a very uncertain period, very volatile period. And if you don't play it right, it can be quite a tough period for your portfolio for beginner investors that here you're talking about some of these themes agree that these themes are taking over the world. I mean, it's tough to disagree with that these days. How should beginner investors be thinking about investing in these themes? [00:10:03][37.0]

Alex Pollak: [00:10:04] Well, you know, everything we do is with a background of thinking about what the risks are involved in that. Right. So and everything we do goes up onto a standardized, multi-year, discounted cash flow model. So and, you know, unless you kind of has those tools, I mean, you know, people sometimes ask me for recommendations and I give them a recommendation. But I always say now this is just a recommendation today. Tomorrow it could change. And then in six months' time, it might change again. So you asking me for a point in time and I'm happy to give any recommendation, so to speak, or what I think is a good stock for a point in time. But people then kind of forget that, you know, that advice is temporal, right? It's not good for all time. It's in a time and place. And so what's so, for example, we held Tesla right all the way up from, you know, in the new money from the sort of forty dollars to six hundred dollars or five hundred dollars. We held it all the way. We held it in a two percent position because it was part of it was a risk, risky investment. And what we said was at a two percent position and we were constrained by our mandate to hold no more than two percent of it. It could go broke because there were chances there. This was in 2017, or it could go up to ten times its value. As it happens, it went up ten times its value and it didn't go broke and it went through our price target and then we sold it. And I can explain to you the reasons why we sold it, why we held it in the first place while we sold it, and why we held it in the first place. But I'm happy to do that. So. All pieces of information about stock tips are kind of temporal in nature, right? They come and go. [00:11:53][108.6]

Bryce Leske: [00:11:53] So, you know, let's take one of the somatics as an example, energy. How do you know which company to back in a space where there are so many disruptors coming into the market. [00:12:05][12.1]

Alex Pollak: [00:12:06] So a lot of it is to do with cash flow. Right. Right. A lot of us to do with cash. So when I say that everything goes up on a standardized, multi-year DCF model, it means that we look at the cash that they generate their operating cash flow less the amount of CAPEX that they require to build the business out. And we simply do a DCF on that. This is not a new tool. This is a time-honored tool that goes, you know, 100 years of finance behind this. It's not new. And if it stacks up, in other words, if it's got sufficient cash flow and doesn't have too much CAPEX such that on the multiyear DCF, the valuation comes in above the stock price, we will consider it. But even if it did that right, I would consider it. But if it had bad management, we'd knock it out or cut it down to, you know, so management comes into it. But the essence of how we what we buy is really tied into the free cash flow and the DCF of that free cash flow. [00:13:00][54.3]

Bryce Leske: [00:13:00] Is Elon Musk a good manager? [00:13:01][1.0]

Alex Pollak: [00:13:03] You know he's a tremendous manager, actually, to have got that company off the ground and the scope of what he knows. I mean, I sort of think of him as another Steve Jobs. Frankly, he's that clever and he's that much of a visionary. And, you know, that's kind of reflected more than reflected, actually, in the stock price today. He's a deeply talented man and an incredibly good manager. But is he human like everybody else? And he makes some mistakes. So, you know, it is what it is. [00:13:35][32.1]

Alec Renehan: [00:13:36] And he should probably not host TV shows as well and [00:13:39][3.0]

Alex Pollak: [00:13:41] stick to your knitting. [00:13:41][0.6]

Alec Renehan: [00:13:42] Yeah, yeah. So, Alex, if you think about disruption, I guess in our like Bryce, in my lifetime, from the late 90s onwards, you really only think about America. You think about Silicon Valley and you think about the amazing companies that have come out of there. I guess what we're seeing now is emergent tech companies and disruptors around the world. You know, one of the companies we're going to talk about today is Mercado Labra. In terms of geography, what are some of the areas that are exciting you at the moment in terms of leading disruption in some of those themes you're talking about? [00:14:15][33.3]

Alex Pollak: [00:14:16] The disruption thing is going on globally, to be frank. And you mentioned Mercado, which is really a combination of Amazon and PayPal and maybe even a little ant financial in Latin America. Tremendous company. I just looked over the results in the last 24 hours from a few days ago, really generating 100 per cent growth on previous corresponding period on a quarterly basis. You know, just every part of the numbers were just really fantastic. But the thing that we it's a globalizing world, right? We're not we don't really play the Australian market much. And so there are disruptive companies all over the world. We buy a lot of them through US exchanges, but that's neither here nor there. You know, we own Alibaba and Tencent and we buy them on the Hong Kong exchange, but we own them for their position in China. We own Makhado, Libra as a company that is globalizing in Latin America. And going back to Alibaba, it's also very active in the rest of, you know, parts of Asia, not all of it, but parts of Asia and also in India. So we look for companies that have got a global footprint, even though they might be listed on the US. And we you know, obviously we own Alphabet Google, you know, to us listed company. But it's got a huge business, obviously, around the world, Australia, Europe, the UK, et cetera, et cetera. So we look for businesses that are that have what you call runway. Right. Plenty of room to expand their business model into new markets. [00:15:46][90.2]

Bryce Leske: [00:15:48] So before we take a bit of a deep dove on some of the stocks, Alex, we'll take a short break to hear from our sponsors. [00:15:53][5.3]

Alec Renehan: [00:15:55] Bryce, you're a man that moves to the beat of his own drum, actually literally moved to the beat of his own drum when you studied drumming back at uni. Yes. [00:16:03][8.3]

Bryce Leske: [00:16:04] Is true. Got booted out. Yes. [00:16:05][1.3]

Alec Renehan: [00:16:06] And after you study drumming, you had a short lived but highly successful career as a Canberra nightclub deejay. So you're all about moving to your own date. And that's great, because our sponsor to kick off today's episode is all about banking to your own beat. And that is Virgin Money. [00:16:25][18.5]

Bryce Leske: [00:16:25] That's right. Ren banking with Virgin money has never been more rewarding. You can earn rewards on your everyday spending and pay zero monthly fees with the Virgin Money Go transaction account [00:16:36][10.6]

Alec Renehan: [00:16:36] and with points, perks, and epic experiences tailored to you. You can manage your money easily on the go, smash your savings goals, get money fit, and be rewarded for it. So, Bryce, are you ready to bank to your own beat? [00:16:50][13.9]

Bryce Leske: [00:16:51] OK, I'm ready to bank to my own Bayit Ren bank to your own Bayt Virgin money [00:16:56][4.6]

Alec Renehan: [00:16:57] terms and conditions and monthly criteria apply. Now let's get into the show. [00:17:01][4.0]

Bryce Leske: [00:17:02] So, Alex, at the Investor Day, you spoke about Roku's, so we might as well start there, and then we'll get some insight into a number of other companies that are on your watchlist or in your portfolio. So let's start with. What is Roku and what is the thesis? Why is it a Destructoid? [00:17:19][16.9]

Alex Pollak: [00:17:21] Roku is a television streaming company. And we I trotted it out at the ASX because it's an example of a disruptive company that's really most people haven't heard of. But it is a deeply disruptive company. It's a streaming company. Most people, when they turn on their televisions, it comes up as two, seven, nine or 10 or in the US, whatever the linear channels are in the US. Roku is a company that provides the operating system for television so that when you turn on your television, it doesn't come up as two, seven, nine or 10. It comes up with a bunch of apps. So we say it's app first, not channel first. Those apps have channels behind them, but they're not necessarily the channels that are in your local area. So when you open up the app, the Roku operating system on your television and by the way, 40 per cent of smart televisions in the US have come with Roku embedded in them, when your television, your Roku televisions, which is on it, which is on that says Disney, plus, you know, Netflix, you know, peacock networks, et cetera, et cetera, and also a whole bunch of free channels. And those free channels are channels that what they say, Roku surfaces, they find them for you because they might not be in your area. They might be areas, you know, they'll be things which are especially interested. They find that channel for you. They bring it to you in your Roku television because they know who you are. And they and they insert advertisements in that stream. Right. So so they give some of that money or a large part of that money back to the content publisher, let's say, to country and Western music channel and that and some of that money they keep themselves are you get to watch the country and Western music channel with advertisements that for free and they have tens of thousands of channels like that which are, you know, available. And they insert the advertisements and they're busy. That's their business model. They are the operating system for smart televisions. It's that quick and it doesn't mean much. But you know how your Facebook feed is a different set of ads to somebody else's Facebook feed. Some people can have a Roku television in two different rooms in the same house. The feed will be the advertisements will be different. That's what they do. [00:19:32][131.1]

Alec Renehan: [00:19:33] So is the long-term opportunity then for Roku to be the platform and incentivize a whole bunch of new free digital channels to be created on Roku and then they serve ads on that? Is that the model that they're chasing? [00:19:45][12.1]

Alex Pollak: [00:19:45] That is you have you've obviously a very quick study here because [00:19:50][4.4]

Alec Renehan: [00:19:50] I don't [00:19:50][0.1]

Alex Pollak: [00:19:51] find it that well, that's exactly what they do. They thrive on streaming diversity. The more the merrier. So when Roku when we first invested it, people said, why would people have roka that have Netflix? No, no, no, no. Netflix sits on the Roku app screen as an application and the more streaming channels that exist, Disney plus Peacock, ABC, iView, you name it. But think about ABC iView, right? ABC iView doesn't have a global presence to go and programmatically put advertisements into its feed in Australia. Right. And even if it did, it would never compete against someone that was doing it programmatically for tens of thousands of channels across geographies all over the world. No economies of scale in the iView version of that, Roku has those economies of scale. [00:20:40][49.2]

Alec Renehan: [00:20:41] So Roku then wants to be on every smart TV currently around 40 per cent. But if they can get massive scale and be the platform, that's the game for them [00:20:50][8.8]

Alex Pollak: [00:20:50] 100 per cent. So they're actually in 50 million television households in the US today. [00:20:54][3.7]

Alec Renehan: [00:20:54] Are there any competitors that are trying to do something similar? [00:20:57][2.0]

Alex Pollak: [00:20:57] Surely Apple TV did? Well, Apple TV doesn't insert advertisements. [00:21:02][4.6]

Bryce Leske: [00:21:03] Yeah, because I'm just thinking I have what Roku is delivering through Apple TV. [00:21:07][3.6]

Alex Pollak: [00:21:07] Yes, you do. But it's not an ad channels, distant channels or any other channels around the world are not really Apple's not really paying them to to be on the Apple television platform. Right. So because Apple doesn't put advertisements in Apple is not an advertising company. [00:21:27][19.8]

Alec Renehan: [00:21:28] If we wanted to make equity, makes TV one day and we would do it for Apple and would get nothing, but we could make a business case if they paid us. [00:21:36][7.6]

Alex Pollak: [00:21:36] So that's exactly right. If you wanted to make equity mates TV and there was somebody in America that was interested in investing in the Australian market, they would surface your television channel to that person in the US and they would insert advertisements into the feed, into the person in the US watching your channel, and you'd get a little bit of that revenue. Right. So you'd be incentivized to actually be on the Roku platform. Because they gave you revenue. Apple has no such arrangement. So there are I mean, YouTube is a competitor in its own right as well, but it's sort of a different thing. You know, it's through a stick. It's the Chromecast. It's not quite the same thing. Right. [00:22:15][38.9]

Bryce Leske: [00:22:15] It's interesting. I'd never heard of it. [00:22:17][1.4]

Alec Renehan: [00:22:18] Yeah, I've heard of it, I haven't looked at it much, to be honest, I always just thought it was an aggregator of streaming services. [00:22:23][4.6]

Alex Pollak: [00:22:23] This is exactly what it is. But with advertising in the back of it, not not. It's what they call about advertising. Video-On-Demand, not eSport subscriber. [00:22:31][8.3]

Alec Renehan: [00:22:32] You know, what would be the killer app for Roku is if it had like a global search because that's the thing that kills me. It's like I know I've got so many subscription services. I know that is the stuff I want to watch. But you have to go into each individual app and find stuff. If that was like a global search where they could index what's in all of the subscription services and you could do a global search, that would be great. [00:22:51][19.5]

Bryce Leske: [00:22:52] Apple TV, does that do that? Yeah, you can go home. Apple TV obviously love Apple TV and you search and it'll say this is in binge or this [00:23:01][9.0]

Alec Renehan: [00:23:03] is Google lets you down a lot of that, does it. Yeah. [00:23:06][2.6]

Bryce Leske: [00:23:06] Interesting. Well, that is Roku. What would be we always like to hear the bear case for some of these things. What would be the bear case for Roku that would make you change your mind on this? [00:23:15][8.7]

Alex Pollak: [00:23:16] In the bear case there are competitors. Amazon is a competitor. We you mentioned Apple. Amazon is a genuine competitor through its via TV because the fire TV is an operating system for television itself. But Amazon's kind of you know, Roku has is kind of pure insofar as they will put in the inventory. That's the highest priced inventory that monetizes your content, whereas Amazon's got a kind of slightly different agenda in there. Right. Amazon's agenda is to sell more Amazon stuff. Right. So they are a competitor, but actually Roku is beating them. I don't really have much of a bear case for Roku. I think it's [00:23:16][0.0]

Bryce Leske: [00:23:56] that's quite a big case for [00:23:57][1.2]

Alex Pollak: [00:23:58] Tesla, if you want. I mean it. Let's you know, there are you know, YouTube is you know, you never rule out Google. You never rule out any of the big players that are big in operating systems on phones for their ability to migrate their operating system to another place. For example, Google, which is a search on your laptop, you know, gave the operating system for phones to phone companies around the world. Right. By the way, that's what Roku does, too, to television makers. So Google could set up a rival operating system and give it away in the same way that Roku does. They'd be starting from square one on that. But Google is a company with a big balance sheet. They probably wouldn't care. But then the question is, is it worth the effort, so to speak? [00:24:42][44.4]

Alec Renehan: [00:24:43] So you've given us a number of other companies here that would love to similarly unpack. Given we're talking streaming and TV, it makes sense that we go to Netflix so most people will be familiar with Netflix. So you don't have to really describe what it does. But I guess what's the thesis for Netflix? [00:25:01][18.5]

Alex Pollak: [00:25:02] Netflix is it's basically running on two hundred million subscribers right now globally. But the TAM, what we call the TAM, because this is one of the things that always we consider target addressable market when whenever we invest in a company or a sector is how big is the TAM target? The addressable market is at least six hundred to a billion, one point five billion, depending on how you because some people can get it on a broadband mobile phone, some get it on television, some people get on the laptop. So and you know, so it's a much larger target addressable market than where it's at right now at two hundred, 200 million households. But the thing that people and we were across this actually three years ago, we did the numbers and did the numbers and did the numbers. And finally we looked at each other and said on this trajectory, this company will be able to return capital to shareholders in two to three years time. And indeed, this quarter, they've just announced a five billion dollar buyback of stock. So they're now buying back. They have they have no further need for capital. Not only do they have no need for capital, they have too much capital. So they're going to give some back to their shareholders. I don't think people kind of completely understand how, you know, what a great position this company's in. It's generating so much free cash flow that it will buy back its own shares. [00:26:19][77.0]

Alec Renehan: [00:26:20] Netflix has a lot of debt on its balance sheet, though. How do you think as a shareholder about them paying off that debt or buying back shares? [00:26:26][6.3]

Alex Pollak: [00:26:27] Well, it's well, two things. It doesn't. It's got twenty odd billion dollars worth of debt, but it's capped at two hundred billion or I think it's around about two hundred dollars billion. Interest rates are very low. And when we say they're buying back their own shares, that's after servicing the debt. Right. So if they're so what they're saying to you is we can service our debt and buy back five dollars billion worth of shares. You know, so what that says to you is that they'll retire a bit of debt in there as well, I'm sure. But they're in the situation now where they're they're they you know, an optimized capital structure has a bit of debt in it because debt is cheap. Right. So it's a better thing, I think, to buy back some shares, which is what they're doing, and then do the debt, you know, piece by piece. You don't want to just kind of wipe it all off together because it's good to have a little bit of debt and. It'll be today. [00:27:18][50.8]

Bryce Leske: [00:27:19] Twenty dollars billion. [00:27:19][0.5]

Alex Pollak: [00:27:20] Well, it on a market cap of two hundred. Yeah, it's actually lovely here. [00:27:23][3.5]

Bryce Leske: [00:27:25] So there's plenty of other streaming services out there and opportunities to invest in them. Why is Netflix the winner takes all in this or why is it the one that you're backing in? [00:27:34][8.6]

Alex Pollak: [00:27:34] Oh, I think there'll be other winners as well. Netflix, again, the Target addressable market for Netflix isn't just people won't only have one streaming service that, you know, Disney will be a one. I suspect HBO, you know, Sopranos, Sex and the City, that's about they'll be another one. People will have two or three or four of these streaming services. They'll and they'll all be there or thereabouts. So Disney's already 100 million. Yeah, they'll be there or thereabouts. So it's not necessarily for everyone else to fail. In order for Netflix to succeed, people will spend 20, 40, 60, 80 dollars a month on their streaming services that will, you know, over time kick out the cable TV bundle. What we have here in Australia, which is Foxtel, which is really in a lot of trouble as a result of Netflix, for example, they kick out the cable platforms and take the streaming platforms of which Netflix will be one. And as I say, Disney will be another, will be a third. They've probably a couple of others as well. Right. And you'll just mix and match. [00:28:37][62.4]

Bryce Leske: [00:28:37] And does Roku then provide the one stop shop for aggregating streaming services? [00:28:41][4.3]

Alex Pollak: [00:28:43] And that is the point, right. So so the Apple TV that you mentioned before and it's a great thing. Right. Is it. But it's not ad-supported. Right. It won't surface for you channels that it doesn't it's its surface is a particular kind of, you know, like Netflix and YouTube and stuff like that. But if you have you know, if you want to catch your basketball channel in Washington or the college basketball channel in Washington, it won't surface that for you. Or if it will, it won't be easy, whereas Roku will do that. [00:29:15][32.6]

Alec Renehan: [00:29:16] So, Alex, you're in good company with this Netflix thesis. We had Hamish Douglass on the podcast earlier this year, and he is super bullish on Netflix, thinks it will be a trillion-dollar company. So, you know, great company, but we do want to hear the bear case. So what could go wrong here? What's the bear case for Netflix? [00:29:35][19.3]

Alex Pollak: [00:29:36] Oh, the bear case for Netflix. Is that what is the bear case for Netflix? [00:29:43][7.3]

Bryce Leske: [00:29:45] Very bullish. Very bullish. [00:29:46][1.3]

Alex Pollak: [00:29:47] I mean, the bear case for Netflix would simply be around valuation, right? I mean, there's no doubt that this model is going to be the model of how people watch television in the next ten years. We already know that that's obvious. The bear case is that it's simply overvalued and that Disney over time develops better content than Netflix does. And Peacock does and HBO does. And Netflix, therefore, loses market share. And the free cash flow is not it's not as large, et cetera. So that's a very specific question around the pricing. Right. So it's not like it won't be there, but it's conceivable that they make a batch of bad programming decisions and, you know, and other competitors become more important than it. And it loses value and goes down. [00:30:35][47.8]

Bryce Leske: [00:30:36] That's the because. So let's continue on this track. Qualcomm, another stock that is within your investing universe. Why? What is Qualcomm for those that haven't heard of it? And why is it disruptive? [00:30:49][13.4]

Alex Pollak: [00:30:50] Qualcomm, if you've owned 2G, 3G, 4G and now 5G phone, it's more than likely, more than probably 80 per cent likely that it's got a Qualcomm series of modems, baseband chips in it, the things that connect to the towers, et cetera. Qualcomm is the very heart of the communication that takes place on a mobile phone back to a cell tower. And it's a you know, it more or less has that market to itself. And what it's doing, the reason that we like it so much is it's expanding. It's, as it were, target addressable market. There's those words again. So it's not just about the baseband. It's about a whole lot of the other electronics within the 5G framework, which will make it even more important. For example, there's a big Iot, what they call an Internet of Things business and Iot business is just, you know, if you like, that we own a company called John Deere, which is a tractor farm machinery company. We own it because John Deere has been putting sensors on the tractors to assess moisture content in the soil, you know, the chemical composition of soil topography. So you don't run the thing over another stump and break an axle, all of that sort of stuff. Well, all of the sensors essentially use a Qualcomm modem, in the end, to send their signal back to the relevant place in the cloud or factory floor or you and. Is that it's the very it's the glue that holds all of that mobile communications together. Fantastic company. You know, it's more than doubled since we've owned it. And it's a very important company in the 21st century. [00:32:31][100.5]

Alec Renehan: [00:32:32] I mean, we're living through a global semiconductor shortage at the moment. You know, the carmakers are struggling with it. A lot of companies are struggling with it. And it's a good time to be in the business. Everything you create is out the door and straight into a product. But the semiconductor business is also known as quite cyclical. How do you think about stocks like Qualcomm? And I guess do you like trade-in and out as they move through the cycle or are they long-term holders? [00:33:00][27.9]

Alex Pollak: [00:33:00] We buy and sell things. When they hit the top of their valuation range, we sell them and when they fall through the valuation range on the bottom, we rebuy them. And in that way we recycle capital quite not a lot in our portfolio turnover, about 35 per cent per year, meaning that 35 percent of the stocks go through. That doesn't mean we change the portfolio. It just means that you know, we might have held a company at five per cent, then we hold it at two, and then we hold it at nine. And that all comes into the overall calculation. But to answer your question, the chip business, so to speak, is like the silicon content, for example, in cars used to be 50, 100 dollars, 150 dollars. The silicon content in cars over the next five years is going to go up to three thousand dollars. Right. There's a global chip shortage because globally, all businesses we talked about John Deere are going to use more silicon to do more things. Think about this, right? You used to if you had a power break circuit in your car, that was one circuit that went through a wiring harness to a central controller for that. And then the stereo went through another one. Then the indicators went through another series of electrical circuits, etc. Then the, you know, et cetera, et cetera. And you had thousands of wires running around the car. Right. Well, obviously, you know, if you to do the same thing in a mobile phone, it would be the size of this desk. So obviously, microelectronics has revolutionized that. And that's silicon. That's what silicon is all about. And so there's an increased content of silicon in not everything, obviously, but in many, many things, you know, Internet fridges and all that sort of stuff. So that's the kind of showy end of the thing of what's happening. But it's true to say that there is a very significant draw of silicon in everything that we do now. And so it's notoriously cyclical, but it's cyclical right now around a growth line. So and that's what we're seeing right now. And that's why you've seen your 100 billion dollar CapEx from TSMC, Taiwan Semiconductor Company over the next three years. This is unheard of. It's 100, 100 billion dollars over four years. And Intel itself is scrambling to spend, you know, fifty or sixty dollars billion in CapEx to get ahead of this thing right now. [00:35:20][139.2]

Alec Renehan: [00:35:21] So TSMC with the foundry model was pretty, I guess, revolutionary for the chip business. And there's been a number of great businesses that have benefited from that AMD Invidia, I assume, Qualcomm as well. How do you think about Qualcomm in relation to its competitors? You said it's got a really strong position in that 4G, 5G chips, but are they do they have a really defensible moat or Nvidia named? Are you going to come and take their market share? [00:35:51][30.1]

Alex Pollak: [00:35:52] No, no. What Qualcomm does in that there are competitors to Qualcomm, but they're much smaller. No, no. This is about 4G and 5G based baseband capability. It's not in it's not in AMD's or for that matter, even Xilinx is solution set. Right. It's a completely different thing. In fact, Intel, you know, for the last five years, up until a year ago, labored to create a 5G modem for Apple and famously said, I'm sorry, we can't do it literally, and sold that business to Apple. And it's that business that Apple is when they say sold it. I suspect what really happened is that Apple just took all the engineers and Blasik and the IP and, you know, the work in progress. And, you know, they never disclosed a price. But the important part of it is it's that hard. Intel couldn't do it until, you know, it's not able to do a seven nanometer chip as well. Right. This is all highly relevant stuff, but it's so it's not in AMD's portfolio. And neither of Xilinx or anyone else like that. There are competitors, mediatheque, but they're much smaller. Yeah. [00:37:04][72.7]

Bryce Leske: [00:37:06] Speaking of Apple, we should move towards it. But before any [00:37:10][4.2]

Bryce Leske: [00:38:21] So, Alex, we may as well kick off with Apple, you know, obviously a very disruptive company has been for a while. What is the thesis that's keeping you in this one? [00:38:30][9.6]

Alex Pollak: [00:38:32] if you look at the Apple numbers over the last five years, in fact, if you look at the Microsoft numbers over the last five years, but particularly Apple, the services revenue and earnings have been literally just exploding. So they're now at that. They were 16 per cent of total revenue, I think, four or five years ago. They're now at 23, 24 per cent of total revenue. And by the way, the product side of the business, what you know, like iPhones and Macs and iPads and all that stuff, that's still growing. So it's not like that standing still. So the product side is growing, but the services side is growing, too. So Apple Pay is a service on an Apple phone, right? Apple TV is a service for watching. So what Apple is doing is it's created this fantastic series of products on which is its infrastructure, what they call its ecosystem, on which it's able to graph news services like music and television and apple pie. And it's a trivial thing, right? I don't think there is a history in the history of the world. There's ever been a company that was able to communicate with its users with one point five billion users a day. And that's what Apple can effectively do. Facebook can do it as well. But if you go back 30 years ago, the only companies, the biggest companies in the world that were connected with companies like Comcast in the United States with 30 million connected users, this is one and a half billion connected users share. One and a half billion people might have bought a Coke every day, but Coke didn't know who they were and, you know, didn't get a feed, didn't get feedback about whether the Coke machine to warm or etc. So Apple's got one point five billion people approximately on an operating system of its whether it's ICE, whether it's the operating mavericks or one of the things, etc., the desktop and so adding in a music streaming service or adding in Apple Pay, which is of just everywhere right now because of covid is a trivial thing. And they're almost immediately Fortune 500 companies and they spin them out of their existing ecosystem. I increasingly think health is going to be a very important thing for Apple as well. Down the track. Yeah, the wearables, the wearable. [00:40:46][133.5]

Alec Renehan: [00:40:47] Yeah, yeah. There's a lot of competition in that space at the moment. Isn't that Google bought or Alphabeat bought Fitbit or one of the Fitbit. [00:40:54][7.2]

Alex Pollak: [00:40:54] Fitbit. That's right. And there are others besides. [00:40:56][2.0]

Alec Renehan: [00:40:57] Yeah. So go back to Apple, though. This is you know, you're really interested in disruption. And Apple for me is a really interesting company where they were obviously so disruptive and so innovative and they've built an unbelievable ecosystem. I briefly strayed to the Android ecosystem and then came straight back. And there's no denying that it's best in class. And they've now established that. And, you know, their recent quarterly results where you know everything. IPad sales are up to seven percent, all not unbelievable. But all that aside, you know, the hardware business is not as fast-growing as the services business. And so now it's like monetizing all these additional things in the service business. It doesn't feel like they're on the forefront of disruption anymore. It feels like they've built this ecosystem and they're finding different products and services in that ecosystem to really generate revenue. [00:41:49][52.1]

Alex Pollak: [00:41:50] I think that's 100 percent accurate. You know, they have done a disruption trick, but it's a many-layered thing and it's got a few more years to run. But this is not the most disruptive company necessarily anymore. I don't think. I think you know, Tesla is that company now. [00:42:07][17.1]

Alec Renehan: [00:42:08] So then my question becomes, how do you think about vulnerability to the next disruption like this company is now the, you know, the Wal-Mart or the, you know, the Ford of its day where it's like it is the big industrial company that everyone uses and has massive market share? Wendy, how do you like, assess their vulnerability to the next technological innovation? [00:42:30][21.9]

Alex Pollak: [00:42:31] That's a really good question. And I don't know that I have a ready answer for how that works. I mean, how they would be disrupted. I have a model for how Tesla would be disrupted. I can answer that question. So, I mean, we talked about Tesla briefly before. We don't hold it anymore. We did hold it. We made great money out of it. We don't hold it anymore because they Tesla to get to the valuation you have to get to right now, you really have to kind of assume that some of the other car companies don't make a comeback. And VW has now categorically said and it's all it's in all its materials. And remember, VW is the largest car maker in the world. VW has categorically said that the. Are going fully electric and they are the scale producer in the world, right, they are. And Skoda see it, Audy Porche and I think they own Ben Lee, or is it, Rolls Royce? They are the scale producer. Right. So they now understand what it is they have to do. And they are not going to disrupt Tesla's business model, but they're going to compete in it as a formally disrupted company. They're going to compete in disruption that itself. I suspect that's a part of the answer somewhere in Apple as well. You know, Android was that competition for Apple itself. But it's a different product, as you know. It's kind of it's a different Android is a different product. So it's not obvious to me to see, you know, the end of, as it were, the mobile phone on the one hand, and then be the switch from Apple to a different brand. I mean, the Chinese had a really good go at it through honor. And while Wei and Zhao, me and a couple of others. But it's not obvious to me that that will actually ultimately challenge Apple. [00:44:34][122.3]

Alec Renehan: [00:44:34] Yeah, and if someone does challenge Apple, they have two hundred billion dollars on their balance sheet that they can try and buy. [00:44:39][4.7]

Alex Pollak: [00:44:41] Well, you know, I mean, the only one of the bad things about these companies is that they are behemoths right now. And that is a competition, Stifler. And they, you know, governments around the world. And I think and the companies themselves have to be careful that they don't engage in anti-competitive conduct. Of course, they do. I'm not calling anybody out here particularly. I'm just saying that there is a bit of anti-competitive contact going on generally. And that's a bad thing, right, for competition to be stifled. So it may be that governments have to break them up. [00:45:11][30.4]

Bryce Leske: [00:45:12] I like this, you know, Tesla, the Volkswagen, because, you know, disruption isn't only about new companies coming onto the scene. You think about Disney and the disruption they've done from themselves with the streaming. You think about Home Depot, you think about Wal-Mart, you think about all these companies that have had to essentially disrupt themselves to keep abreast of competition or keep up with the competition. So how do you think about Volkswagen as an investment opportunity versus Tesla? [00:45:36][24.6]

Alex Pollak: [00:45:37] Oh, so Volkswagen definitely stacks up better than Tesla right now. That's not to say that we own it at this moment. I'm not sure that we would, but we are looking at it very, very closely. You mentioned as well Disney disrupting itself. That's exactly what it did. I wanted to mention it myself. Disney had 75 years of contractual mechanisms by which its distributed programs all around the world, they've ripped all those up and they're basically doing a Netflix competitor. And that's fantastic, right? Because it keeps Netflix honest. And Disney has disrupted itself and moved to the streaming model, just as VW has disrupted itself and said no more petrol, petrol or diesel engine cars going forward. And I think we are going one of the big things that we're going to see is the disrupted companies starting to come back into the market. You know, years ago there was a television commercial, that code from Kodak, which was the Kodak moment. Right. And the Kodak moment was to take a picture of a beautiful thing that happened. Right. That was their television commercial to sell Kodak film. Kodak had a different kind of Kodak moment. They invented the digital camera and then didn't act on it. And their Kodak moment was failing to, you know, move into digital and away from the film. There's a lot of companies like VW and Disney that have had, as it were, Kodak moments in the last few years. And they determined in that Kodak moment not to wind up like Kodak, that they're determined to remake themselves as proper competitors in the 21st century. And I applaud that. I think there's going to be a lot of value to be had out of those companies, and we're very interested in them. [00:47:13][96.1]

Alec Renehan: [00:47:14] There's a lot of businesses these days having Kodak moments, not in the technology space as well. You know, I think of like a Myer and how they weren't able to innovate and they just are getting destroyed these days. [00:47:25][10.9]

Bryce Leske: [00:47:26] Myer, who? [00:47:26][0.4]

Alec Renehan: [00:47:28] I think we looked down 90 percent since they released in 09 [00:47:31][3.2]

Alex Pollak: [00:47:32] year, it's been terrible it's bad, right? I mean, I don't I genuinely feel for, you know, the Myer brand and the people, the people in particular, and all the suppliers and the people who, you know, for whom Myer was their business life. But I don't know what to do about it. Right. Yeah. [00:47:51][19.4]

Alec Renehan: [00:47:52] So the last company we've got on this disruption list is one that I'm really excited to get your thoughts on because it's a fascinating company. It's an incredible company. And I don't think a lot of people in the community will have heard about it. So Makhado, Labra, can you tell us what it does and then what's the thesis? [00:48:12][19.5]

Alex Pollak: [00:48:13] Thank you, Alec, for that question, because it's a great company. It's it is the eBay stroke. Amazon of, you know, particularly Brazil, Mexico, Argentina, but Latin America, generally, they are massive, just like Amazon is. They're massive into one-day and two-day shipping. They are literally just processed the quarter the other day. The quarterly results, literally grew topline, grew 100 per cent quarter on prior corresponding quarter. Operating income was up more than triple, went from a loss to a profit that they're just basically Amazon for Latin America and they've got a payment engine as well, just like PayPal was when the PayPal on eBay were together ten years ago, five years ago. They've got a payment engine. So, you know, it's not as wealthy Brazil, Mexico as, you know, the United States where Amazon plays, but it's still a market that absolutely loves, you know, a bargain and a home-delivered bargain. And remember, the simple thing that Amazon did and that Mercado Libre did is, you know, from the dawn of time when people have had something to sell, they've opened a shop that's, you know, that that is tens of thousands of years of, you know, stuff that happened. The disruption that Amazon did and Makhado Labor does is says, let's not open a shop because that costs 15 percent of my revenue in turn in rent to the landlord. Let's open an online shop then. Then I have an immediate 15 percent cost advantage relative to someone who's in, like, my shop, and therefore I can give consumers 50 percent cheaper prices. That's what Amazon does. That's what Mukada Labor does. That's what Alibaba does in China. And so we own these e-commerce plays around the world because they're a little local. I won't say monopolies because there's plenty of competition for them in those places, but they're performing really well. It's now, I think, Latin America's largest single company out of nothing fifteen years ago. So it's been a great company. It's been a great performer for us. [00:50:27][133.9]

Bryce Leske: [00:50:28] So, Alex, it's been a fascinating conversation. Plenty of stocks that we've covered. And I'm sure there's plenty more in your fund. For those of you in the equity markets community who have enjoyed listening to Alex and would like to find out more about what he's doing or invest in his fund. The good news is the Loftus Global Disruption Fund is available on the ASX. The ticker is l.P JD. So you can publicly trade that and get access to what you're doing, at least as big as an ETF as an ETF. Yes. Is there anywhere else that our listeners can go to find more information or follow you? And are you on Sociales? [00:51:01][33.8]

Alex Pollak: [00:51:03] We're on LinkedIn, definitely. And you know, we publish a lot of stuff on our Web, on our blog, et cetera, et cetera. And we do the speak to people, et cetera, and go to ASX conferences. Yeah, the ETF is a fantastic product because there are two kinds of ETFs, active ETFs and passive ETFs. The passive ETFs are just they just replicate the index and there's nothing wrong with that. That's fine if you get the right one where we're an active ETF, meaning that we manage the positions within the ETF. So, you know, you buy one stock ETF on the ASX, you get all of our curation of the companies that we invest in at the relevant rates and the performance that we, as it were, cook up. And that's why I mean, I think ETFs are really good. I like ours, too. [00:51:51][47.6]

Bryce Leske: [00:51:52] I would say that we're not. [00:51:53][1.3]

Alec Renehan: [00:51:54] So that would be a revelation. Yeah, that's I don't go out so we could talk stocks all day with you, but we do like to end these interviews with the same final three questions. So we'll get onto those. The first one is, do you have any books that you consider must read? [00:52:11][17.3]

Alex Pollak: [00:52:12] One book that I consider a must read is Empire of the Summer Moon, which is the story of the settlers in the United States moving westward. And what happened, how they did that and when what happened to particularly the Comanche Indians. And it's it's a fascinating story about, you know, how countries are built. It's not pretty as you would expect, but it it's just a, you know, a great eyeopener, almost good book history. I love history. [00:52:49][36.4]

Alec Renehan: [00:52:50] So the second question, in 60 seconds or less, what's the best company you've ever come across? [00:52:56][5.6]

Alex Pollak: [00:52:56] The best company, I would have to say it's got to be a choice between [00:53:02][6.1]

Bryce Leske: [00:53:04] we're looking for one [00:53:05][0.6]

Alec Renehan: [00:53:06] and giving us a choice. You can use the choice. [00:53:07][1.2]

Alex Pollak: [00:53:08] I mean, you know, you'd have to if it's the best company, I would have to say Tesla. That's not the cheapest company. Right. And I would say either Tesla or Apple, and I don't really mind which Tesla, because it completely reimagined and disrupted the car industry and Apple because it completely reengineered and remastered not just the phone system, it's that because that's a tiny part of what Apple does, it understood the importance of the phone as a connected point in a network. And so those two companies really are they will go down in history, in my view, as the two probably most important companies of the 21st century, [00:53:49][40.6]

Alec Renehan: [00:53:50] um, until Elon Musk lands on Mars with SpaceX and then SpaceX can join that as well. [00:53:55][5.9]

Alex Pollak: [00:53:56] I mean, you know, the brilliance of Elon Musk, I continue to reflect on this. Right. Whoever thought about a reusable rocket? It's actually, in effect, a space elevator. Yeah. [00:54:07][11.0]

Bryce Leske: [00:54:07] All had the ability to execute. [00:54:08][0.9]

Alex Pollak: [00:54:11] I mean, I take my hat off to him. It's he's a brilliant guy. It's not that that technology wasn't around before that, but he understood the value of it and commercialized it. [00:54:19][8.8]

Alec Renehan: [00:54:20] And so then, Alex, final question. If you think back to your younger self, you know, investing in that first property with your brother, what advice would you give to your younger self? [00:54:28][8.3]

Alex Pollak: [00:54:29] My advice to my younger self would be don't confuse pleasure with happiness. [00:54:35][5.9]

Alec Renehan: [00:54:37] OK, I like that [00:54:40][2.7]

Alex Pollak: [00:54:41] because sometimes happiness is, you know, it doesn't feel very you know, it can be quite an unpleasant feeling, but in with the butt. But when you see people being happy around you as a result of you making the right decisions, that's enormously gratifying. So never confuse, you know, [00:55:00][18.4]

Bryce Leske: [00:55:00] pleasure with happiness. Pleasure with happiness. Nice. Well, Alex has been a thoroughly enjoyable discussion over the last 50 minutes. Plenty of stocks that we've covered on a lot of our audience will have taken a lot of value from that. Given that I'm sure almost all of those stocks will be in many of the portfolios within our community. I'm not sure about macabre Laborites, so not sure about McArtor Liebreich. But yeah, it's been great. And we appreciate you coming on and also appreciate your time at the ASX. [00:55:28][27.2]

Alex Pollak: [00:55:28] And thank you so much for having me on the program. I really enjoyed this. Thank you for giving me the opportunity and Bryce and love to do it again. [00:55:35][7.0]

Alec Renehan: [00:55:36] Thank you. I love that as well. Appreciate you coming on. [00:55:38][1.9]

Speaker 4: [00:55:38] Excellent mates investing podcast is a product of equity meets media. All information in this podcast is for education and entertainment purposes only. It is not intended as a substitute for professional finance, legal or tax advice. The host of Equity Meets Investing podcasts are not financial professionals and are not aware of your personal financial circumstances. Before making any financial decisions, you should read the product disclosure statement and if necessary, consult a licensed financial professional. Do not take financial advice from a podcast. For more information, had to the disclaimer page on its website. But you can find ASIC resources and find a registered financial professional near you in the spirit of reconciliation, equity meets media and the Hopes of Equity Makes Investing podcast acknowledge the traditional custodians of country throughout Australia and their connections to land, sea and community. We pay our respects to their elders past and present, and extend that respect to all Aboriginal and Torres Strait Islander people today. [00:55:38][0.0]


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