For financial year 2024.
About this letter
Annual letters are a chance for fund managers to speak directly to investors, and share updates on performance, emerging trends, and market developments related to the portfolios they manage.
This year, our Spaceship Voyager annual letter is from Jason Sedawie, our VP of Investments at Spaceship, and it takes a look back at the financial year.
Jason looks back on the 2024 financial year, and shares updates on the Spaceship Universe and Spaceship Earth portfolios, which are made up of stocks picked according to our Where the World is Going (WWG) methodology.
In this letter, he covers:
- WWG trend updates
- The WWG process
- 2024’s biggest falls by Spaceship Universe portfolio contribution
- 2024’s highest rises by Spaceship Universe portfolio contribution
FY24 was a good year for Spaceship Voyager investors. Thanks for being on the journey.
Dear fellow investors,
As anticipated, AI emerged as the dominant force in share market performance over the past year, surpassing a market constrained by high interest rates and uneven economic conditions.
A select few stocks such as Microsoft, Amazon, Alphabet, Nvidia and Meta, which feature across our Spaceship Voyager portfolios, have outperformed for a simple reason: better-than-expected company earnings.
These five major technology companies have increased their earnings by an estimated 84%, compared to a 5% increase for the rest of the market.
Future earnings estimates for these stocks have risen by 38%, whereas the rest of the market has seen a 5% decrease. Despite their price increases, these stocks have risen in tandem with earnings growth, ensuring that valuations are not overly stretched.
So what does that mean for the new financial year?
Similar to others, we anticipate that market breadth will improve, which means the wider market should rally, as interest rates decline, and the broader economy – including sectors such as consumer goods – shows signs of improvement.
AI progressing from calculation to cognition
Despite the negative macroeconomic news, innovation and technology are accelerating.
Previous innovations were fueled by Moore’s Law, which predicted a doubling of compute power every two years.
Now, with graphic processing units and parallel computing, we are experiencing a doubling of compute power every six months, as illustrated in the chart showing the acceleration in the "deep learning era."
To provide context for this growth, if the deep learning era continues, in ten years time we would anticipate an increase of 1,048,576 times the original speed, compared to the 32-fold increase projected by Moore's Law.
This expansion extends beyond computing power to encompass the growth of large language models (LLMs) such as ChatGPT.
Outputs now encompass not only calculations but also content generation and knowledge creation. The market potential has expanded from mere calculations to a broader intelligence market.
Considering the advancements achieved under Moore's Law, it’s exciting to contemplate future innovations given the current growth trajectory.
Below: Chart detailing computing power increasing 4.1x a year instead of the historic average of approximately every 1.4x a year.
https://epochai.org/data/notable-ai-models#explore-the-data
Semiconductors benefiting now, with software poised to follow suit
Across the market, AI continues to capture investor attention and investment dollars.
The Spaceship Universe Portfolio has allocated approximately 11% of its portfolio to semiconductor companies, while the Spaceship Earth Portfolio currently stands at approximately 14.5%.
Looking forward, we believe some of the most compelling investment opportunities lie in software companies, which have lagged behind broader technology returns, especially those of semiconductor companies.
While AI investment has positively impacted most semiconductor stocks, its implications for software companies are varied.
We continue to advocate a focus on software companies that benefit from increased data utilisation and user engagement, rather than reliance on traditional hiring patterns.
Companies relying on per-seat licensing models are experiencing slower growth due to reduced hiring practices among businesses.
The Spaceship Universe Portfolio has approximately 18% of its portfolio allocated to the software and big data trend while the Spaceship Earth Portfolio has approximately 22.5%.
The retail sector shows the least strength in current trends
The weakest performing trends in the Spaceship Voyager portfolios have been in retail.
Established consumer brands such as Starbucks, Nike, and Lululemon are facing challenges due to a subdued consumer environment and heightened competition.
We’re still confident in the enduring strength and consumer appeal of these brands but are monitoring these positions closely.
Where the World is Going companies must create and capture value
As a recap, Where the World is Going is our investment methodology that emphasises a company's growth potential, its trend, and its moat or competitive advantage.
1. The trend is a company’s capability to create value, such as AI.
2. The moat is a company’s ability to capture and maintain that value through a strong competitive advantage.
Some of the moats we consider in our WWG methodology include branding and scale, which create barriers to entry for a company’s competitors. (Check out our Spaceship Voyager reference guide for more about the WWG process.)
Using this framework of trends and moats, let's now examine a selection of both the top and bottom performing stocks over the past year in the Spaceship Universe Portfolio, which is the most widely held Spaceship Voyager portfolio, considering both share price performance and percentage weightings.
Bottom performers by Spaceship Universe Portfolio contribution
1. Unity
Owned since 2021.
Unity is a leading creator of 3D content, a gaming engine with a dominant position in the mobile gaming sector.
Despite its strong market position, Unity's shares have been our poorest performer in FY2024.
A key takeaway from this experience is the importance of closely monitoring management focus.
Management's strategy to expand into non-gaming markets, which we support, inadvertently led to a dilution of attention on its core gaming segment.
This was exacerbated by a poorly communicated pricing change from seat licenses to downloads, impacting free-to-download games significantly and resulting in a backlash that led to the previous CEO's resignation.
However, Unity maintains its stronghold as the game engine behind approximately 69% of the top 1,000 mobile games.
Despite these setbacks in pricing and its advertising division, Unity's gaming customer base remains intact.
We believe the company's moat is still robust because the economic feasibility of migrating games to smaller community engines is impractical. Nevertheless, Unity’s growth trend has been tempered.
Currently, Unity generates only about 1% of its revenue from the $260 billion gaming industry, a figure we consider too low given its potential and value to customers.
We remain optimistic about the company's revenue growth prospects, although recovery under new management is expected to be gradual.
Unity is in the Spaceship Universe and Spaceship Galaxy Portfolios at the time of writing.
2. Tesla
Owned since inception of the fund 2018.
Tesla is a leading electric vehicle (EV) manufacturer, yet we perceive it as more than that; its advancements in AI, vision and manufacturing present an interesting opportunity for Tesla to expand into broader robotics.
Tesla faced challenges in the past year amid slowing EV sales. While we believe in the continued growth of EVs — especially considering the U.S. penetration rate of only 8.1% compared to the global average of 14.5% — we envision a broader strategic opportunity.
Similar to other disruptive companies like Amazon, which expanded from book sales to diverse retail sectors and eventually cloud services, Tesla's manufacturing platform and AI expertise suggest future potential in robotics.
Despite acknowledging governance concerns and near-term financial pressures, particularly as Tesla makes substantial AI investments (projected at US$10 billion this year) with delayed returns, we maintain a steadfast long-term perspective on the company.
This viewpoint is rooted in our admiration for Tesla's strong brand, impressive manufacturing capabilities, AI proficiency, and the extensive array of potential business avenues these skills offer.
We are mindful of potential challenges and actively managing our position.
Tesla is in the Spaceship Universe, Spaceship Earth, Spaceship Galaxy, and Spaceship Origin portfolios at the time of writing.
3. Align
Owned since 2018.
Align owns Invisalign, the leading brand in clear braces.
The decline in Align's shares in FY2024 can largely be attributed to macroeconomic factors affecting its predominantly adult customer base where they hold a significant 25% share, which tends to be more discretionary.
Unlike adults who may postpone orthodontic treatments, teenagers, comprising a smaller 5% market share, typically are less likely to put them off and are less discretionary.
We maintain confidence in Align's robust competitive position, supported by strong branding, dentist training, scale advantages, and cutting-edge 3D printing capabilities — producing half a million parts every day, making Align the world's largest user of 3D printing technology.
Furthermore, Align's strategic vision to digitise dental workflows through scanners, apps, and software is further enhancing its competitive moat.
The clear aligner trend remains robust, with clear braces addressing only 10% of the total market. We anticipate that clear aligners will continue to expand the addressable market relative to traditional wire braces.
https://investor.aligntech.com/static-files/2f7bb65f-3fc5-4150-8abb-1004b63c8925
Align is in the Spaceship Universe, Spaceship Earth, and Spaceship Galaxy portfolios at the time of writing.
4. Enphase Energy
Owned since 2021
Enphase is a leading provider of solar panel inverters, which convert solar power into usable electrical power.
The company's shares have faced challenges due to elevated interest rates, with loans being the majority of solar panel payment options.
Furthermore, California's implementation of new rate plans has significantly reduced the compensation homeowners receive for solar power fed back into the grid, causing solar adoption to be less attractive.
California is the United States’ biggest solar market, as well as one of the world’s largest. These dual factors have dampened demand and extended the payback period for potential solar panel buyers.
While the adoption trend has weakened, we maintain confidence in Enphase's strong competitive position against rivals.
Unlike traditional systems that monitor overall output, Enphase's technology allows for individual solar panel monitoring, facilitating fault detection and maximising uptime—critical benefits for solar installers and homeowners.
We continue to hold our position. We anticipate increased strain on the grid from rising electricity demands due to electric vehicles and artificial intelligence, resulting in higher electricity prices, making solar panels increasingly cost-effective.
Enphase is in the Spaceship Universe, Spaceship Earth, and Spaceship Galaxy portfolios at the time of writing.
5. Illumina
Owned since inception of Spaceship Voyager in 2018.
Illumina is a global leader in genomic and DNA sequencing.
Shares declined in FY2024 due to slowing growth following Illumina's introduction of a new machine and the problematic acquisition of Grail, a liquid biopsy test for cancer detection.
Despite Illumina's long standing profitability, the acquisition of Grail, aimed at multi-cancer early detection, not only eroded value through overpayment but also resulted in overall financial losses due to the technology's early-stage development.
The executives responsible for the acquisition have since departed, and Grail has been spun off, which means it exists as a separate company as its shares now trade independent of Illumina.
We believe Illumina's market dominance, with 80% market share, highlights its strong competitive edge, although the growth trajectory has weakened.
There are also concerns that Illumina's latest generation sequencing technology, while reducing sequencing costs, has yet to drive significant adoption. Historically, previous price reductions have spurred new applications and increased volume, offsetting the price declines.
We continue to closely monitor these trends in adoption.
Illumina is in the Spaceship Universe and Spaceship Earth portfolios at the time of writing.
Top performers by Spaceship Universe Portfolio contribution
1. Nvidia
Owned since inception of the fund 2018.
Nvidia is the premier company in graphics processing chips, widely utilised in AI applications.
Nvidia has become a household name, even reaching the top spot as the largest company globally at one point during the last quarter.
We have held Nvidia in our portfolio since its inception due to its gaming chips' capability for parallel computation, which is crucial for processing vast amounts of data efficiently, especially in AI applications.
ChatGPT and other models have contributed to Nvidia's data center revenues growing substantially, from US$10.6 billion in 2022 to US$47 billion in the past year, FY2024.
We believe the current share price adequately reflects the existing opportunity and future growth may encounter increased physical constraints, such as the availability of data center facilities and electricity agreements, which may curtail growth.
Moreover, significant customers such as Amazon and Microsoft, are spending substantial amounts in absolute dollars which may slow growth of future AI spend.
Nvidia, Amazon, Alphabet, Meta, Microsoft now account for 22% of all capex and research and development in the US.
Nvidia's competitive advantage and growth trajectory remain robust. However, in light of recent share performance, we have reduced our position to align it closer to our target level.
Nvidia is in the Spaceship Universe, Spaceship Earth, Spaceship Galaxy, and Spaceship Origin portfolios at the time of writing.
2. Crowdstrike
Owned since 2021.
A leader in cybersecurity, Crowdstrike has established itself as a platform safeguarding endpoints—from laptops to the cloud.
Several positive developments have bolstered Crowdstrike over the past year.
The Securities and Exchange Commission's mandate requiring companies to disclose significant cybersecurity incidents and enhanced annual cyber risk management disclosures has provided a favorable regulatory environment.
Crowdstrike capitalised on this by introducing Falcon Flex, a flexible subscription pricing model that allows customers to set spending levels and access a wide array of services without lengthy procurement cycles.
The trend outlook has improved with the rise of AI-driven cyber threats, which has underscored the value of Crowdstrike's platform approach.
Unlike competitors' siloed solutions, Crowdstrike integrates data and insights across all its services, enhancing customer preference for comprehensive cybersecurity solutions. Moreover, Crowdstrike's recent partnership with Amazon's AWS, a leading cloud provider, further validates its capabilities in securing cloud environments.
Overall, we think Crowdstrike's trend and moat are on a positive trajectory.
Crowdstrike is in the Spaceship Universe, Spaceship Earth, and Spaceship Galaxy portfolios at the time of writing.
3. Meta
Owned since inception of the fund 2018.
The premier social network boasting more than 3 billion users.
While the CEO Zuckerberg continues to invest in the Metaverse, AI advancements have been a boon to Meta's broader operations.
Meta has reaped benefits from AI, enhancing content recommendations (30% of Facebook posts are recommended, Instagram 50%), advertising effectiveness, and also employee efficiency.
Moreover, Meta has introduced Meta AI, leveraging its Llama 3 model to power an AI assistant deployed across Whatsapp, Messenger, Instagram, and Facebook. These initiatives have strengthened Meta's competitive position and growth trajectory.
Furthermore, our confidence in Meta's standing in short-form video has grown, driven by the success of Reels, which now accounts for about 50% of Instagram's total time spent, coupled with the possibility of a TikTok ban.
Overall, we maintain a positive outlook on Meta's moat and growth prospects.
Meta is in the Spaceship Universe, Spaceship Origin, and Spaceship Galaxy portfolios at the time of writing.
4. Affirm
Owned since 2021.
A prominent fintech payments platform with strategic partnerships with Amazon, Shopify, and Apple Pay.
We see Affirm as potentially becoming a modern-day American Express for younger users, backed by its founder Max Levchin, a co-founder of PayPal.
In FY2024, Affirm rebounded from previous underperformance seen in the fintech sector due to concerns over high interest rates and economic uncertainty.
In a competitive payments and Buy Now, Pay Later (BNPL) market, Affirm distinguishes itself by offering diverse loan types and adaptive checkout experiences that personalise payment options based on user data and preferences.
This capability has cemented Affirm as a preferred partner for leading merchants, who have reported a significant increase in average cart size—more than 60% higher —following adoption.
Affirm's recent introduction of debit-plus cards, allows users to select financing options after their purchase, targeting physical transactions and expanding its market reach.
While Affirm's competitive advantage is still developing, we believe its partnerships with tech giants such as Amazon, Shopify, and the recent integration with Apple Pay will enhance scale, data capabilities, and drive continued growth trends.
Affirm is in the Spaceship Universe, Spaceship Galaxy, and Spaceship Earth portfolios at the time of writing.
5. Uber
Owned since 2020.
A leading platform for ridesharing and delivery services.
Uber was once a high cash-burn venture with uncertain profitability prospects.
Since Dara Khosrowshahi took the helm in 2017, Uber has steadily transformed this narrative.
Today, Uber is profitable and recently joined the S&P 500 index late last year. At the time of writing, the stock price is up over 75% since October 2023.
In 2023, Uber completed 9.4 billion trips, growing 24% year on year, generating gross bookings of $137 billion and free cash flow of $3.3 billion. Uber has 150 million monthly active users, net revenue of $43 billion, and earlier this year reported a $7 billion buyback (greater than Lyft’s market capitalisation of $5.3 billion).
Rides continue to generate the majority of earnings, while Eats has been raising service fees and ramping up monetisation efforts to boost the bottom line. Eats is rapidly approaching Rides in terms of gross bookings, and Uber is expanding its sales of groceries, alcohol, and convenience products. Uber is also significantly expanding its advertising base and increased their advertising merchants by 75% year on year to 550,000 earlier this year. Additionally, Uber is investing in the Uber One membership to enhance customer retention and provide more value to users.
We maintain a favourable outlook on Uber's competitive position and growth prospects.
Uber is in the Spaceship Universe, Spaceship Galaxy, and Spaceship Origin portfolios at the time of writing.
Thank you
We trust this letter highlights our Where the World is Going process in practice and our insights into key investments.
Our objective remains the same: to grow your capital, maintain low portfolio turnover to minimise taxes, and to continue investing in Where the World is Going.
Thank you once more for your support.
One or more of the Spaceship Voyager portfolios invest Unity, Tesla, Align, Enphase Energy, Illumina, Nvidia, CrowdStrike, Meta, Affirm, and Uber at the time of writing. Please refer to the Spaceship app or our website for more information on what each portfolio invests in.
Important! We’re sharing with you our thoughts on the companies in which Spaceship Voyager invests for your informational purposes only. We think it’s important (and interesting!) to let you know what’s happening with Spaceship Voyager’s investments. However, we are not making recommendations to buy or sell holdings in a specific company. Past performance isn’t a reliable indicator or guarantee of future performance.
