Bonus Episode: Stock Of The Year 2021

HOSTS Alec Renehan & Bryce Leske|3 February, 2021

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.

It’s time for Bryce and Alec to choose their stock of the year! Will Bryce hold his position as the Retail Whisperer, or will he break out of the bricks and mortar world? Will the Equity Mates community succeed in getting Bryce known Australia-wide as the Retail Whisperer? Will Alec’s stock lose over a quarter of its value? We’ll pitch two stocks that we’re excited about, but remember these aren’t buy, hold or sell recommendations, you always need to do your own research.

If there’s stock you want to pitch, then get in contact with Equity Mates and hear your voice on the show! Send us a message here.

Make sure you don’t miss anything Equity Mates related by signing up to our email list.

And if you love everything Equity Mates and want to support their work, this is where you want to go.

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Bryce Leske: [00:00:56] Welcome to another episode of Equity Mates, our aim is to help you on your investing journey, break down the barriers from beginning to dividend. Whether you're an absolute beginner or Warren Buffett, we guarantee Equity Mates. We'll have something for you. My name is Bryce and as always, I'm joined by my Equity Mates Ren. How's it going, bro? [00:01:13][17.0]

Alec Renehan: [00:01:13] I'm very good, Bryce. I am two episodes into your new opening. I don't know if it will flow. I think I think we did a little bit more flow. [00:01:25][12.3]

Bryce Leske: [00:01:26] It'll flow. Trust me, it's just because I used to be able to rattle off the old ones so easily. Yeah, yeah, yeah. Got to get into the rhythm of this one. But this one encompasses a little bit more about what Equity Mates is about. So I think just give it some time. [00:01:39][13.3]

Alec Renehan: [00:01:40] OK, I want to say more rhythm and more flow from you. Next time [00:01:43][3.4]

Bryce Leske: [00:01:44] I'll make sure I put some time in my diary [00:01:46][1.8]

Alec Renehan: [00:01:47] No just do it. [00:01:49][2.4]

Bryce Leske: [00:01:51] So in this episode is all about our Stock of the Year and twenty one we've just done our bold predictions for twenty twenty one. Again, a reminder to all of you out there, we would love to hear your bold predictions. So head to Equity Mates dot com forward slash contacts to do that. But as is tradition as well, we upped the stakes and choose one stock that we think is going to outperform the other. Now, traditionally, I have been the winner of this. [00:02:14][23.8]

Alec Renehan: [00:02:17] Not just the winner this episode. I really just shouldn't even participate. For the context I seem to be able to pick a stock that will lose at least a quarter of its value. [00:02:31][13.4]

Bryce Leske: [00:02:32] whatever Ren is about to say short [00:02:34][1.6]

Alec Renehan: [00:02:35] look, I've had a lot of time to think about this over summer and there were a lot of directions that I could have gone. And I'm happy to talk about the ones that I didn't choose. But at the end of the day, I've definitely gone for one that I think has a limited downside. [00:02:52][16.7]

Bryce Leske: [00:02:53] OK, I say going risk protection. [00:02:54][1.4]

Alec Renehan: [00:02:55] I am. I think it's actually got a fair bit of upside, actually. The more I looked into this company, the more I thought it was pretty amazing. [00:03:01][6.5]

Alec Renehan: [00:03:03] But I've sort of going like worst case scenario. Could it could it have in value again? No. And I don't think this one will be. And look, to be fair, I've thought that every year that I've picked an OK company and who we are. So who knows. [00:03:21][18.2]

Bryce Leske: [00:03:22] before we jump in as well, we just want to let you guys know that we do now have the ability for for you to support us if you if you're really enjoying what we're doing. And I think that the content is providing you a lot of value and helping you on your investing journey, then if you had to Equity Mates dot com forward slash support, there is a function there for you to be able to to give us a one time donation or perhaps put something in a bit more regular. But we would certainly appreciate anything that you could throw away. Help us keep the lights on and keep this content rolling. We we have a lot of things planned this year and very much looking forward to bringing more of the world of investing to you guys. So head to Equity Mates dot com for such support. [00:04:03][40.9]

Alec Renehan: [00:04:03] Yeah, I love doing Equity Mates. I hate going to sponsors to try and ask them for money. So if you can save me from that, I don't think you've ever done that. Yeah. Again doesn't do that. So yeah it would be great [00:04:23][19.6]

Alec Renehan: [00:04:23] if you could support us if you can first of all. And if you want a second of all obviously. But yeah. Anyway let's see enough of that, let's, let's get into this episode. So um. Whenever we do an episode where we talk about an individual stock, we do need to make clear that we're not experts. We're here on the journey trying to learn with everyone in the Equity Mates community. We're not making a buy, hold or sell recommendation here. We're just trying to apply everything we've learned to individual companies. And these are two companies that are going to be talking about today. But do your own research, make your own decisions, speak to a financial professional if you feel that's something you need to do. But hopefully out of this episode, you get an idea of how we're thinking about companies and how we've researched companies. And hopefully, that helps you on your journey, looking at companies and researching companies. [00:05:21][57.4]

Bryce Leske: [00:05:21] Nice. [00:05:21][0.0]

Alec Renehan: [00:05:25] I want you to kick it up. [00:05:26][0.8]

Bryce Leske: [00:05:28] Fine, I will kick it off. So, Ren, look, there are a number of cracking companies I think that we could choose from around the world. Stocks have done pretty well for themselves. [00:05:38][10.3]

Alec Renehan: [00:05:39] Some stocks have done well over these stocks. The stocks have done really well [00:05:42][3.4]

Bryce Leske: [00:05:42] over the years. And look, I'm really looking forward to pitching some of these stocks that are on the watch list on the hypothetical portfolio. You know, if I stick with the retail theme, we've got Restoration Hardware. I know you like Home Depot, but Restoration Hardware is one that I'm looking forward to pitching Disney. I'm still really enjoying. There's one called Spacy, which is a company in the States that provides cloud based supply chain management software that's sort of appealing. And of course, Airbnb, I don't think we've put into the portfolio yet either. However, I'm going to be doing something quite bold for two reasons here. One is that I think usually I do a retail stock. [00:06:20][37.4]

Alec Renehan: [00:06:21] Yeah, you got to do retail. You are the retail whisperer. I'm not doing retail trying to break my model Equity Mates twenty twenty one. We should all work together to try [00:06:30][9.2]

Alec Renehan: [00:06:30] and get Bryce labeled as the retail whisperer in the Australian Financial Review. [00:06:35][4.4]

Alec Renehan: [00:06:35] That would be a good goal for the big, but I don't know if I could. There's currently a Queensland University of Technology professor, Gary Mortimer, that every time there's a retail story on the news or anything, he's always the one quoted. I don't know why that is, but when I was at Coles and you'd get like the Daily News extract of all the retail stories, he was always one quoted. He's just somehow got a monopoly on being quoted in the media about retail stories. [00:07:05][29.5]

Alec Renehan: [00:07:05] OK, that needs to be you. OK, Price Vicari more about twenty twenty one uncle. Yeah, let's do so. [00:07:13][7.6]

Alec Renehan: [00:07:14] Hold on. I hope I got his name right. Anyway, keep going. [00:07:18][3.3]

Bryce Leske: [00:07:18] Breaking out of the retail for this year and the second bold part of this is that I'm actually going to be pitching a stock that isn't yet publicly listed. [00:07:28][9.8]

Alec Renehan: [00:07:29] Okay. Yeah. [00:07:29][0.7]

Bryce Leske: [00:07:30] So I'm confident that it will IPO this year. [00:07:33][3.5]

Alec Renehan: [00:07:34] I mean, if it doesn't IPO, I automatically get the win. [00:07:37][2.9]

Bryce Leske: [00:07:37] Of course. Yeah, so I'm risking a lot here, putting myself on the line. [00:07:41][3.6]

Bryce Leske: [00:07:42] But I think that I like the company. It's something that I have enjoyed researching because it's in an area that I've wanted to get exposure to and never have taken the time to really dig deep into it. And look, IPOs were popping like crazy last year, and I'm hoping that this thing pops as well and continues to run. So, yeah, risky move, but it's bold. [00:08:04][21.9]

Alec Renehan: [00:08:05] Are you going to keep me in suspense or are you going to let me know the company is? [00:08:08][2.6]

Bryce Leske: [00:08:08] the company well, firstly, there's a lot of IPOs coming on. [00:08:11][3.4]

Alec Renehan: [00:08:11] We can probably do an inside on that process coming off of Brett Lee like the run up there. [00:08:16][4.8]

Bryce Leske: [00:08:18] The company is roblox. [00:08:21][2.8]

Alec Renehan: [00:08:23] Okay. Have you heard of it? [00:08:23][0.9]

Alec Renehan: [00:08:26] No, I don't know about it. I've heard the name. [00:08:28][1.8]

Bryce Leske: [00:08:28] Yeah. Yeah. So I think so. It's an online gaming platform. It's a company that creates this online gaming platform and it is massive. It started in 2006. I'd never heard of Roebuck's roadblocks. Sorry, but it's a sandbox game and a sandbox game is a video game with a gameplay element that kind of gives players a lot of creativity to interact in environments with other people. So the most well known, I would say, would be Minecraft you've heard of. [00:09:01][32.9]

Alec Renehan: [00:09:01] I have never played it. [00:09:02][1.0]

Bryce Leske: [00:09:02] Never played it either. Yeah. Caveat here. And either rent or I really gamers. Although you do have Tiger Wood. [00:09:07][4.6]

Alec Renehan: [00:09:09] Yeah, yeah. [00:09:10][0.3]

Bryce Leske: [00:09:12] So yeah it's, it's competing with Minecraft but it's massive I think in terms of total players, it was ranked in the top fifteen games worldwide. Okay. That's against, you know, the Pacman Jones of the world. [00:09:25][12.9]

Alec Renehan: [00:09:27] Well legal age. Yeah exactly. Oh those ones. [00:09:30][3.5]

Bryce Leske: [00:09:31] So why do I like roadblocks. Well firstly as I mentioned, it's a game. In the gaming industry and I have always wanted to get exposure to the gaming industry, haven't bought any ETFs to do with it, but it's it triggered my, I guess, interest to explore this industry. And I'm not a gamer myself, as I said, but this has really opened my eyes to a whole world of opportunity, of understanding how these companies work and really the sheer scale of them. Like it's phenomenal, the number of people that they're capturing in their environment and the ability to monetize that is very appealing. So the video game industry is estimated to be worth about two hundred billion in the next couple of years. So it's currently about one hundred and fifty billion. So some pretty decent growth coming over the next sort of two or three years. Roadblocks, though, has two appealing elements for me, the network effect, we love companies that have a network effect, and that means that the more people that use the platform, the better the platform will become and the more I guess, well, the better the experience for everyone using the platform would be would become. Would you agree that that is a definition of the network effect? [00:10:45][73.3]

Alec Renehan: [00:10:46] It is I'm interested to know how the network effect applies here. Well, hold on. Hold on. Maybe before you move on from defining it, maybe give an example for people who are perfect. [00:10:55][9.0]

Bryce Leske: [00:10:55] Example would be social media platforms or Facebook, for example. The more people, the more of your friends that are on Facebook, the more engaging and I guess rewarding your experience is going to be on Facebook. If you were the only person on Facebook, it'd be shit. Roblox relies on its users to actually create the environments that people interact. So the more people that come on and create environments, the better the platform will become, the more people that will come onto it. And there are two incentives that are, one, incentivized developers to come and build environments and then incentivize the users to come and interact in these environments. And the second effect that I think is great is that it's it has a pretty good social effect. So people build avatars and in some cases, they then spend a whole bunch of money on these avatars and create a whole world that is essentially their second person and interacting within the game in a social environment. They're actually trying to create their own sort of category, which is called Kho Human Environment. And they see this as a big play when it comes to virtual reality, where people create these avatars in worlds and will eventually be able to really submerse themselves and interact through they are or whatever it might be. So that's sort of what it does in a nutshell. Any questions thus far? [00:12:17][81.9]

Alec Renehan: [00:12:18] I mean, no. OK, no, I don't really understand what I can't really picture what the gaming environment is, but I don't I don't want to get bogged down in that. [00:12:27][9.1]

Bryce Leske: [00:12:28] I couldn't either. I had to go and jump on YouTube. And it makes total sense when you have a look imagine like just and this is going to sound stupid for those that are playing it. But imagine like a massive Sim's environment. Yeah. Yeah. Where you create an avatar and you try and complete challenges and blah, blah, blah. So let's have a look at the nuts and bolts. One hundred and sixty four million people are active on this each month, which is pretty phenomenal to put that size Minecraft. One hundred thirty one million. So it's actually bigger than Minecraft. And Minecraft is perhaps one of the most well known sandbox games. It's seen phenomenal growth, particularly over the covered period, 81 percent growth over the last year. But the growth rates have been above 60 percent since sort of 2018. Mind you, this did start in 2006. So it's a pretty old company because seventy five per cent of all us kids between the ages of nine and 12 play the game. Well, huge. So it really is attractive to kids aged between nine and 12. And I'll get it to a that's [00:13:32][64.6]

Alec Renehan: [00:13:33] It's a very specific age bracket between nine and 12. [00:13:36][3.4]

Bryce Leske: [00:13:36] Yeah, yeah. [00:13:37][0.3]

Alec Renehan: [00:13:37] But that's pretty crazy. Thrane for kids. [00:13:38][1.5]

Bryce Leske: [00:13:39] Yeah. And now they're raising money to try to develop a way in which they can I hold those people for a lot longer but also become more appealing to older people and try and get that sort of a figure for maybe 12 to 15, 15 and beyond, whatever it might be. The people who are playing it playing at two and a half times more than they are spending on YouTube. So to just give you an idea of the sort of scale of this in terms of a business model. So they have generated half a billion, just over half a billion, five hundred and eighty million dollars in revenue in the last nine months, up to the end of 2020. Sorry, how much? Five hundred and eighty eight million. [00:14:20][41.5]

Alec Renehan: [00:14:21] Okay, well, yeah. [00:14:22][0.8]

Bryce Leske: [00:14:22] So pretty significant revenue and that's grown from three hundred million in 2018 eighteen. So pretty significant revenue growth. The two main ways that they create revenue so they have their own coin quarter. Roebuck's users will go in and obviously convert real currency into Roebuck's and then that allows them to unlock multiple things in the game, spend on avatars. [00:14:46][23.9]

Alec Renehan: [00:14:46] Michael, micro transactions. [00:14:47][0.8]

Bryce Leske: [00:14:48] All that, all that sort of. Yes, yeah. Yeah. And then the developers are also incentivized by the roebuck's coins, which can then be converted by for themselves back into real currency. They're either paid by users for their environments or the more that people use their environments that they were rewarded with these coins. And some of the best developers are on very high sort of six-figure salaries each year and making a decent amount of money. So they're the kind of two main ways you have to buy the coin and they just take a clip on the transaction. However, this comes straight from the mouth. This comes straight from their IPO and their prospectus. We have a history of net losses and we may not be able to achieve or maintain profitability in the future. [00:15:35][47.0]

Alec Renehan: [00:15:36] Wow. [00:15:36][0.0]

Bryce Leske: [00:15:37] So whilst they are making pretty significant revenue, they're not turning a profit. Worth noting. Mm hmm. Um, but, look, if they can manage to monetize the audience in a profitable way, then, you know, who knows what's possible. So they've raised one hundred and fifty million recently through Andreessen Horowitz, one of the big VC firms in the States. Yeah, that was at a valuation of four billion. They are about to IPO and want to use the funding to expand internationally and to appeal to international gamers. So that's kind of my pitch. I'm really just banking on here that the stock market disregard the fact that they're unprofitable. They're seeing pretty significant growth. The risk is that a lot of the growth over the last 12 months has absolutely been from covid and they recognize that the growth rates they're currently seeing might not be sustainable. Yeah, but I also think that the majority of their users are in the states at the moment. If they can use the money that they raise to expand internationally, then there's no reason that the growth rates can't sort of continuing in that vein. And ideally, given that they have so many users at a young age, if they can build a model that keeps those users over a long period of time, that lifetime value of customers pretty strong. [00:16:53][75.5]

Bryce Leske: [00:16:55] That's my pitch. [00:16:55][0.3]

Alec Renehan: [00:16:56] Nice, I mean, isn't your biggest risk that the investment bankers priced the IPO at a stupidly high valuation and then it went from like when you, in inverted commas, would buy the shares? Because let's be honest, you're not getting in pre IPO. [00:17:11][15.1]

Bryce Leske: [00:17:11] Yeah, yeah, yeah. I'm getting a fair hearing. [00:17:13][2.2]

Alec Renehan: [00:17:15] From the first whatever price it hits the boards that it may just be that they price it too high. It might be everything you said might be true, but you might get stung by the Goldman Sachs or the Citibank or whoever the hell. [00:17:27][12.3]

Bryce Leske: [00:17:27] Can we put a caveat that it's at the price of IPO, that we'd come in pre-IPO? [00:17:30][3.2]

Alec Renehan: [00:17:31] No. [00:17:31][0.0]

Bryce Leske: [00:17:33] We just did that for your bold prediction. Which one was that. [00:17:36][3.2]

Bryce Leske: [00:17:37] Whatever your IPO was. [00:17:39][1.1]

Alec Renehan: [00:17:39] Oh, the stripe one. Well, look whatever. [00:17:44][5.4]

Bryce Leske: [00:17:46] You are right. That is a risk. It is an absolute. [00:17:47][1.5]

Alec Renehan: [00:17:48] Yeah. [00:17:48][0.0]

Bryce Leske: [00:17:49] And look, I think for me, look, I know this is Stock of the Year. I just kind of got too deep in this in the research side before I considered the impact of the actual competition between us. [00:18:01][11.4]

Alec Renehan: [00:18:02] Are they an American company? [00:18:03][1.5]

Bryce Leske: [00:18:05] Yes. I don't know. Do you have that in front of you? [00:18:08][3.0]

Alec Renehan: [00:18:08] No, I'm pretty sure they are, yeah. Hey, man, this is your picture, [00:18:10][2.2]

Bryce Leske: [00:18:13] um, founded by a couple of blokes. Twenty six, as I said. Yeah, it looks like it. [00:18:19][6.4]

Alec Renehan: [00:18:20] I just wondering where they were going to list. So I imagine [00:18:23][3.3]

Bryce Leske: [00:18:24] they're going to be listing in the States. Yeah. Yeah, yeah. 100 percent. [00:18:27][2.4]

Alec Renehan: [00:18:28] OK. Oh well so we'll keep [00:18:29][1.7]

Bryce Leske: [00:18:30] track of that. Look, I'm happy to put all of that info online. Somehow we figure out how to do it and then you can have a look at the notes yourself. [00:18:37][7.7]

Alec Renehan: [00:18:38] I'm interested, uh, if you were going to put not not just for this exercise, but if you were going to put your actual money into it. Yeah. Would you play it beforehand? [00:18:49][11.1]

Bryce Leske: [00:18:50] Yeah, I watched a lot of videos, surprisingly, to get an idea to just get the scale of, like, how people are interacting with this. And there are a lot of YouTube is it's big. [00:19:01][10.7]

Alec Renehan: [00:19:01] So you've completely avoided my question. [00:19:03][2.0]

Bryce Leske: [00:19:04] Yeah, no, I wouldn't play it. [00:19:05][1.1]

Alec Renehan: [00:19:06] That's interesting. I think I would want to play it, [00:19:08][1.9]

Bryce Leske: [00:19:08] but I just don't have anything to compare it to. Then I'll have to play Minecraft and then I'll have to play to be like, is this better than like interestingly Minecraft? I think it's only been around for two years. It's got one hundred thirty one million. It's been around for since 2006. [00:19:20][11.8]

Alec Renehan: [00:19:21] No Minecraft, no more than two years hasn't it. I think so. [00:19:24][3.2]

Alec Renehan: [00:19:24] I feel like I've heard about it for a long time. You might, you're throwing a lot of because out here [00:19:28][4.0]

Bryce Leske: [00:19:30] it's a lot newer, it's a lot newer than roadblocks. [00:19:35][4.7]

Alec Renehan: [00:19:36] So I guess. Yeah. Well I think at the very least what I would want to do. Minecraft was released in 2011. [00:19:41][5.0]

Alec Renehan: [00:19:42] Oh. Initial release that 2011 [00:19:44][1.5]

Alec Renehan: [00:19:45] initially released is what was known as Minecraft classic on May 17th, 2009. The game wasn't fully realized in November 2011. [00:19:52][7.0]

Alec Renehan: [00:19:54] Anyway, let's not worry about Minecraft because. [00:19:56][2.1]

Bryce Leske: [00:19:57] No, yeah, it's not public,. [00:19:58][1.4]

Alec Renehan: [00:19:58] Although I would be. No, it's owned by Microsoft. [00:20:03][5.0]

Bryce Leske: [00:20:04] Microsoft. [00:20:04][0.0]

Alec Renehan: [00:20:06] Anyway, I think at the very least I would be speaking to like my, my kid cousins who are sort of in that nine to 12 age bracket and trying to understand like what do they think of roadblocks? Is it cool for them to play or is it like a new game that they're playing? Because selling to kids can be fickle like if that nine to 12 window is the window you've got to hit and they're obviously hitting it hard, they're going to make sure that the next nine-year-olds and you know. Yeah, yeah, [00:20:32][26.1]

Bryce Leske: [00:20:33] yeah, I agree. And I think they've recognized that they can't keep relying on the nine to 12 year olds, which is why they want to try and yeah. Make it more appealing to an older demographic. So with that's going to come a lot of money spent on, I guess, their engines and maybe changing environments to become less child friendly and a bit more, I guess. [00:20:52][18.7]

Alec Renehan: [00:20:52] But, you know, like, I'm just thinking of teenagers being like, but that's a kids game. Yeah. Yeah. Anyway, look, I think it's I think anything that can get three quarters of the population to do something is a very compelling business. So don't get me wrong, I like it. I'm just trying to think what the contrarian argument would be. But, um. Yeah, I like it. [00:21:14][21.8]

Alec Renehan: [00:21:14] Nice. Here's a question. If. [00:21:16][2.0]

Alec Renehan: [00:21:18] You know, a lot of these big tech companies are making plays in the gaming space, so Microsoft bought Minecraft, Amazon bought which Apple released a few gaming things that everyone's trying to get into the gaming, the gaming ecosystem. Could a company end up just buying roadblocks? [00:21:39][20.8]

Bryce Leske: [00:21:40] I don't see why not. [00:21:41][0.5]

Alec Renehan: [00:21:41] What would that do for our stock of the game? We'd have to review that. Yeah, you'd have to. You'd have to. Do you want to back up one that's just not don't give us the pitch? Just give us a back up name now. [00:21:52][10.3]

Bryce Leske: [00:21:52] Restoration Hardware. [00:21:53][0.7]

Alec Renehan: [00:21:53] OK, done. [00:21:53][0.4]

Bryce Leske: [00:21:56] It's listed in the state's restoration hardware, R.H. if you want to look it up. [00:21:59][3.5]

Alec Renehan: [00:21:59] OK, nice. All right. [00:22:01][1.3]

Alec Renehan: [00:22:01] Well, that was a great picture, I think. Let's take a break here from our sponsors and then I will tell you the company that is fated to lose 50 percent of its value in [00:22:10][8.8]

Alec Renehan: [00:22:10] 2021, that's one. [00:22:11][1.5]

Bryce Leske: [00:22:12] When you are all about getting fit, you've bought the garment, you bought the golf membership, you bought the gym membership and you're on the mind MasterChef and even in lock down last year, you bought those resistance bands of Instagram that from memory didn't even come. [00:22:26][14.0]

Alec Renehan: [00:22:28] No, look, they didn't come. But all of that effort really was canceled out by the numerous menu log orders that were a real staple of my lockdown experience. [00:22:37][9.5]

Alec Renehan: [00:23:25] All right, so I'm a little bit nervous about this but you really just referred to it, you're saying twice bitten? No, once bitten, twice shy and three times bitten the fourth time. [00:23:38][13.2]

Alec Renehan: [00:23:41] OK, so I'm going to there's a few vectors or a few connections between your stock and my stock, first one being my company that I'm pitching or not pitching, but putting forward owns one percent of roadblocks. It also owns five percent of Tesla, owns five percent of Redit, owns seven percent of Activision. Blizzard owns five percent of after pay as part of a three hundred and fifty billion dollar investment portfolio. And that's not even the key part of the business. [00:24:18][36.9]

Bryce Leske: [00:24:18] you've got my ears. [00:24:20][2.5]

Alec Renehan: [00:24:23] So the company that I am talking about today is Tencent traded in Hong Kong ticker zero seven zero zero Hong Kong users numbers not take a code. Also, there's like a foreign depository that tracks Tencent in the US. But, yeah, it's a it's a Chinese company traded in Hong Kong. All right. Now, you'll get those times here where you're going to need to take me out of the way. So just like I got a bit of a smile, right? [00:24:53][30.3]

Bryce Leske: [00:24:53] You've got 15 minutes. You got 15 max. [00:24:56][2.8]

Alec Renehan: [00:24:57] So Tencent was founded in 1998. Pony Ma, the key founder to make Internet products for pages and pages. Big business today. That's why I'm investing now. They are they're very quickly pivoted away from pages and created a social messaging app called Cucu. Cucu is still a massive social network in China, but in 2011, Tencent released the China super app WeChat. Yeah. Have you heard? [00:25:29][32.0]

Alec Renehan: [00:25:29] Heard of it? [00:25:30][0.4]

Bryce Leske: [00:25:30] I'm on it. [00:25:30][0.3]

Alec Renehan: [00:25:30] are you? [00:25:30][0.0]

Bryce Leske: [00:25:31] Oh, yeah. I tried to start our business and got on. [00:25:35][3.9]

Alec Renehan: [00:25:35] Oh yeah. How did you find it. [00:25:38][3.1]

Bryce Leske: [00:25:39] I didn't know it was tough. It's you need to know the language Mandarin. [00:25:42][3.3]

Alec Renehan: [00:25:44] Yeah. [00:25:44][0.0]

Alec Renehan: [00:25:45] So we WeChat is a super app and super apps are pretty uncommon concept for Westerner's but in a lot of developing countries super apps are quite common. They're basically the app upon which all other apps are built. And for WeChat what that means is that. Well, I mean think about if like UBA menu log, you know, the Sydney Morning Herald News staff, all of that was built on Facebook. So rather than opening separate apps to do this stuff, you opening Facebook and then you're ordering food through like the app in Facebook or like you were ordering a ruleset. I don't know if we will, to be honest. Um, but so that's what we chat is it started as a it's a social media play, but it's really now a super app and there's a start to give you. So to give you an idea of how much time people spend on WeChat. So the average daily. So WeChat has over a billion monthly active users. Basically, if you're a Chinese person with a phone, you have WeChat, the daily average user. So the average daily use of WeChat is four hours, which is more than the average daily use of Facebook, Instagram, Snapchat and Twitter combined. [00:27:10][85.0]

Bryce Leske: [00:27:12] You have it if it encompasses a lot of those elements, then that kind of makes sense. [00:27:17][4.8]

Alec Renehan: [00:27:18] Yeah, but still combine Facebook, Instagram, Snapchat, Twitter, all combined. Don't equal what WeChat has. [00:27:24][6.1]

Alec Renehan: [00:27:24] Yeah. All right. Well, I was pretty blown away by the bus. OK, I'll take you. [00:27:29][4.3]

Bryce Leske: [00:27:33] It's Sucking up those functions. [00:27:33][0.4]

Alec Renehan: [00:27:34] So one thing is that there's so many users on. The second thing is that really valuable Internet companies are being built on top of WeChat. So it's a super app, as we said. But to give you an idea of the scale of businesses that are being built on WeChat data, which is China's answer to Uber, currently valued at 60 billion dollars, built on WeChat PIN Duoduo, which is a Chinese e-commerce platform mainly focused on the regional areas that Alibaba don't service as well, currently valued at 200 billion dollars built on WeChat matron, which is China's number one food delivery app. Kind of like the updates on menu log of China, currently valued at two hundred and thirty billion dollars built on WeChat. [00:28:21][46.3]

Alec Renehan: [00:28:23] The important thing to note is that when these apps are being built on WeChat, Tencent have an opportunity to invest early and see potential at which they've done they own. They invested in Day-Day Pinjarra and made one among a number of others. And then they also have the opportunity to whatever companies they've invested in that are built on their platform. They can then push to their users. And so, like they can sort of have a self-fulfilling prophecy of the businesses that they that are building on their platform, they can put in front of all their users. So I don't know if I've done a good job of explaining the dominance of which. Absolutely. [00:28:23][0.0]

Alec Renehan: [00:29:00] But it's done. but that's just one business area where WeChat is dominant. So it's that equal largest social network with Facebook. I'm not sure what the measures are, but, yeah, equalizes, I guess, in terms of like monthly active users or something. [00:29:18][17.4]

Bryce Leske: [00:29:18] must be because it couldn't be total reach. [00:29:20][2.4]

Alec Renehan: [00:29:21] No. Yeah, well, this is the thing, so we'll get to it. But there's a constraint on Tencent cents operating businesses, which is really it's a domestic operator. It's constrained in terms of how it can grow those operating businesses. We'll get to that on top of being the equal largest social network with this dominance in the Chinese market. It's also the world's largest gaming company. Just for good measure, it's also the world's second largest music service and one of the world's largest venture capitalists. [00:29:51][30.1]

Bryce Leske: [00:29:52] But that's interesting, but we'll get to that. [00:29:54][2.4]

Alec Renehan: [00:29:55] We'll get to that in terms of the gaming business. So it's really got three elements of its gaming business. It develops games in-house under its Tencent Games division. It releases Chinese versions of non Chinese games. So partners with, you know, makers all over the world and to release games in China. And the number three, it invests in non Chinese game publishers and developers around the world. And to give you an idea of their reach, this this was in twenty eighteen, but it still holds true for of every 10 investment dollars worldwide in the gaming industry were 10 cents for every ten dollars, but then over seven in every 10 dollars of mergers and acquisitions. So like actually buying game developers and game companies with Tencent, they just they dominate this space. They some of the some of the games that they own or have invested in League of Legends, they own the maker of that fully clash of clans, that mobile game. They are 84 percent of that company fortnight. They own 40 percent of epic games. The company that makes that are they own five percent of Activision Blizzard, which makes Call of Duty, World of Warcraft a whole bunch of other stuff. And they own five percent of Ubisoft, which makes Assassin's Creed far cry. That's just the top end of a very long list of gaming businesses that they have either fully bought or invested in. [00:31:22][86.9]

Alec Renehan: [00:31:24] They're huge. Yeah, massive. [00:31:25][1.2]

Alec Renehan: [00:31:26] now what they do with this money is so they've got these they've got a number of other operating businesses that do quite well. But I don't want to get too in the weeds on all of those. The two big ones are social throwaway chat and Cucu and the gaming stuff. With the money that they make from that recently, I think they made about five billion dollars us a quarter in terms of profit. They take that money and then they pay it out. Then they invest it in companies all around the world to give you an idea. So the company have said they've invested in over 700 businesses. I've found a list of the top 103 that they've invested in, which when I first started doing this, when I started writing this a few days ago, was worth about three hundred and thirty billion dollars. It's a live sheet that totals its now worth three hundred and fifty six billion. So it's chump like twenty six billion dollars in a few days. But just to give you an idea of some of the companies you may have heard of that they own that they've invested this their in their profits into five percent credit, five percent of Tesla, 12 percent of SNAP, nine percent of Spotify, two percent of discord, 18 percent of dotcom, 10 percent of Universal Music Group, 10 percent of all the ride hailing up 25 percent of gogia, which is a Indonesian. Yeah, like yeah, five percent of Dadey, 15 percent of Nayo, the Chinese version of Tesla, 17 percent of pintura duo, one percent of roadblocks. Your company, my boys. So they are just investing money all over the world. [00:33:10][104.8]

Bryce Leske: [00:33:11] Sounds like the Equity Mates business model [00:33:12][1.4]

Alec Renehan: [00:33:14] to give you an idea. And so I guess the point then is that's fine. A company can have a really strong operating business, take its profits and invest it elsewhere. But if it's making shitty investments, you're actually losing value for the shareholders. Now, that's not a good thing. Luckily, that's not what Tencent story is. The world's greatest venture capital fund is Sequoia Capital, which has invested in 109 Unicorn's. So private companies that are or were valued at more than a billion dollars. Tencent have invested in 52, putting it at the number two spot. And then I think Softbank is number three. But they've also just got so much cash and Tencent claim that they've done more than Sequoia. But from what I was reading, there's no proof of that. So, yeah, they've taken that money and they've invested it. Well, I think this is really the key point. The other thing that they're doing is when they're not investing in companies, they're partnering with really interesting brands and just expanding their dominance in China. So they have the rights to the NBA in China until 2024. They partnered with Lego to develop games for children. Carrefour, the French supermarket giant. Yeah, they partnered with them to trial some retail concepts in China. They're just like they're just this, like, giant conglomerate. Now that, you know, if you want to work in China, you want to work with them. They've got all this money that they want to invest around the world, and that's exactly what they're doing. And so for May well, hold on. I'll pause here if you've got any questions or comments because otherwise I just keep rolling. [00:34:58][103.9]

Bryce Leske: [00:34:59] No questions or comments. [00:34:59][0.7]

Alec Renehan: [00:35:00] Okay. Okay. [00:35:00][0.5]

Alec Renehan: [00:35:01] Um, so. The number one takeaway is the huge the number two takeaway is that in a number of key verticals, they're dominant. They're not like a third or fourth player, the number one player in a lot of things in gaming, the number one in China in social, the number one in China. The App Store is number one in China, they're mobile browser is number one in China. Video, they're number one in China. Mobile payments, they're number one in China by monthly and daily active users, cloud services, the number two. But still, they just have all these dominant pockets. And then what you can do is you can line up on the revenue that they make from these businesses against the best in class businesses in the world and the revenue that they make. So like you compare Tencent payments business to PayPal's payments, business is a little bit small, but not that much smaller. You compare Netflix's subscriber revenue to Tencent video subscriber revenue. Again, smaller, but not that much smaller, media adds. New York Times is apparently best in class outside of China. Tencent makes more than them in gaming Nintendo. Tencent is making more from gaming revenue, social ads, Facebook, smash them in their social category, and cloud computing. You know, like Amazon Web Services, Amazon is a fair bit bigger. But there's this chart that maybe we can share on Sociales or something. Tencent can compete in so many different categories with the best in the world. It's just it's just crazy the more you write about this company. But anyway, I'm going to get to the the long and the short of it. And I did some back-of-the-envelope math for this and it's a couple of days old, but the principle still holds. The current market value is around 800 billion US dollars if you strip out the value of all the investments in other businesses. And this is just what I could find. So the top hundred. So forget the other 600. The company saying they're investing in it's about 350 billion. So 800 less 350. You've got four hundred and fifty billion left. So that means the market is valuing the operating businesses, the gaming business, the music business, the social media business, the actual operating business. At about four hundred and fifty dollars billion, they're doing about five billion in profit a quarter, so about twenty billion in profit a year, which means you're getting a price to earnings ratio of about what, twenty-two and a half. Yeah. So you compare that to what, you know, most tech businesses outside of China, the price to earnings they trade at, it's a pretty. It's a pretty good valuation. [00:37:57][175.6]

Alec Renehan: [00:37:58] Yeah, very low, multiple. [00:37:59][0.9]

Alec Renehan: [00:38:00] So for me, given my track record with Stock of the Year, I like the fact that there's a lot of upside. You know, potentially they've saturated the Chinese market and they're needing to move across to all these new verticals because they will have trouble expanding internationally. But then it feels like there's not too much of a premium put on that operating business. Twenty two and a half price to earnings and then the growth should really come from a lot of these investments playing out the you know, having five percent a Tesla over the last two months would have been a great investment. So for me, yeah, [00:38:45][45.1]

Alec Renehan: [00:38:46] that's the [00:38:46][0.4]

Alec Renehan: [00:38:47] if the domestic operating business can be a, you know, a cash cow and they can keep spitting out profits, and then they can keep allocating that profit sensibly into other businesses around the world. For me, that's a really interesting company. [00:39:01][13.7]

Bryce Leske: [00:39:02] Massive company. Yeah. Yeah, enormous. With fingers in many pies I think. Yeah. It's pretty phenomenal when you go into the hood and find out what they're doing with their profits, what they're investing in, the exposure that they have to a number of businesses that we obviously also like investing in. So yeah, good research, I think. Pretty amazing. My only sort of comments would be around the risk of being a Chinese company and and the risk that comes from government stepping in and trying to assert their dominance over dominant Chinese companies. And then also your point around how far until they saturate the Chinese market and have to start relying too much, perhaps on their investing side of the business? [00:39:50][48.4]

Alec Renehan: [00:39:51] Well, I think there's those two questions are interrelated, because I think whilst the especially the social media like especially well, whilst WeChat is compliant with the Chinese government rules around, you know, letting the government basically say everything and monitor everything and all of that international expansion is just going to be off the cards like we're not going to be downloading, which although apparently, you did. I did. Um, so like whilst they're complying with the Chinese government, you're probably not going to expect much international expansion of some of the key products. I mean, gaming maybe more so, but not Sociales. But, uh, if you flip it around and they're like, alright, we want to expand internationally, then that might put them in conflict with the Chinese government. Given the fact that Jack Ma disappeared for a few months and apparently was saying last night, but it was on like a video call. It was a 90 second video. Yeah, um, all [00:40:50][58.8]

Bryce Leske: [00:40:50] a bit source. Didn't mention anything stupid, really. [00:40:52][2.5]

Alec Renehan: [00:40:53] SARS in like a nondescript room. Yeah. Yeah. Um, anyway, I think you would expect this business to continue to comply with the Chinese government's stay a domestic operator in terms of Sociales try and find some of these avenues like, um, like gaming to to expand internationally, but really expand the international footprint through investments and. So, yeah, I think that's really the play nice run. [00:41:21][28.5]

Bryce Leske: [00:41:22] So we're recording this on the 21st of Jan. We'll take the date from today for a performance and we've got roadblocks yet to YPO and Tencent, hopefully, something that is not going to lose 50 percent in value. So I'm sure it's not random. It's a phenomenal business. We might try and get that research available at some point. But yeah, I don't know how to try and get it up, maybe on the website or through potentially an email that we'll discuss in in near future. So stay tuned for that. But we'll leave it there. Both stock pictures for twenty twenty one. Thank you for joining us. A reminder that our Equity Mates doesn't stop. When you have finished with this podcast, though, you can email us at contact@equitymates.com, follow us on all the social channels or head to our website equitymates.com/contact and leave us a voice message or some other information on our contact page. If you are stuck for recommendations, we do have our Get Started Investing podcast for the beginning of Buffett's. And also our latest podcast is comedian, vs The Economist, having a lot of laughs listening to the boys over there, Adam, who is a comedian, and his brother, Thomas, The Economist breakdown of macro economics in easy to digest ways. So head over there and also stay tuned for some new shows coming for Equity Mates media this year, but Ren we'll leave it there. Always fun kicking off 2021 We've done our bold predictions now Stock of the Year. [00:42:50][88.0]

Bryce Leske: [00:42:51] Let's see how it plays out. [00:42:52][0.8]

Bryce Leske: [00:42:52] Sounds good. [00:42:52][0.0]

[2288.2]

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