How ChatGPT and interest rate rises impacted some of our Spaceship Voyager portfolio companies in February 2023.
For our Spaceship Universe and Spaceship Earth portfolios, our in-house investment team handpicks companies that adhere to our Where the World is Going investment methodology, which includes a focus on long-term trends such as e-commerce, cloud computing, fintech and health.
(Companies in the Spaceship Earth portfolio also align to the UN Sustainable Development Goals Agenda – or as we say, have a positive impact on people and the planet.)
While markets tend to rise over the longer-term, the short-term can be quite volatile, and February was no different.
What happened in February?
We asked our Spaceship Voyager Investment Team for the backstory on some of the bigger moves in our Spaceship Universe and Spaceship Earth portfolios.
In February, ChatGPT captured the attention of the market, and some of our portfolio companies benefited. Closer to home, the RBA continued to increase interest rates in an effort to control inflation, and Australian consumer spending is forecast to keep declining: we don’t have many Australian consumer stocks in our Spaceship Universe or Spaceship Earth portfolios but some of those we do have were impacted.
So here’s a closer look at how Nvidia, CloudFlare, Temple & Webster, and Domino’s Pizza Enterprises were impacted by these shorter-term trends. It’s important to remember they’re just four of the dozens of companies in the Spaceship Voyager portfolios.
We remain committed to our long-term investment ethos, and we remember that headlines don’t last, but great businesses do.
Nvidia
Nvidia rose 25.66% in the Spaceship Earth and Spaceship Universe portfolios in February 2023.
What does Nvidia do?
Nvidia invented the graphics processing unit, or GPU, in 1999.
GPUs are the chips or circuits that render graphics on electronic devices.
Rendering pixels (graphics) in parallel was also found helpful in accelerating AI applications, because multiple data tasks can be performed simultaneously rather than sequentially. Put simply, GPUs are good for gaming and for crunching data at the same time.
What happened to Nvidia in February?
Along with announcing its quarterly revenue and 22/23 fiscal-year results in late February, Nvidia also announced that it’s partnering with leading cloud providers to offer AI-as-a-service, which enterprise customers will be able to access through their computer browsers.
Investors reacted positively to the Nvidia CEO Jensen Huang’s comments on AI and Chat GPT which uses Nvidia’s chips.
“In no computing era did one computing platform, ChatGPT, reach 150 million people in 60, 90 days. I mean, this is quite an extraordinary thing. And people are using it to create all kinds of things. And so I think that what you're seeing now is just a torrent of new companies and new applications that are emerging. There's no question this is, in every way, a new computing era.”
Nvidia’s valuation increased as investors rated the business of selling AI systems and software more favourably than just selling semiconductor chips on their own. They gave more value to a business with recurring software sales rather than one-off hardware purchases.
CloudFlare
CloudFlare rose 18.98% in the Spaceship Earth and Spaceship Universe portfolios in February 2023.
What does CloudFlare do?
Cloudflare is a differentiated global content delivery network with points of presence across 275+ cities and 100+ countries.
It’s designed to make everything you connect to the internet secure, fast and reliable, and as of 2022 delivered services to ~20% of the web and 30% of Fortune 1000 companies.
CloudFlare is positioning itself as the fourth major public cloud, integrating the other major clouds and letting customers use the best features from Amazon’s AWS, Microsoft’s Azure and Google’s Cloud Platform.
What happened to CloudFlare in February?
Cloudflare announced better than expected earnings for the 4th quarter of 2022 in mid-February, which included substantial increases in revenue and operating cash flow.
Cloudflare consistently delivers strong operating results coupled with ambitious goals – such as a $5 billion of run-rate revenue in the next five years (it achieved $975 million in 2022) – but what excites us is the major new technology trends that amplify the need for Cloudflare's technologies and products. These include adoption of 5G, IoT, CI/CD DevOps processes, Edge Compute, Multi-Cloud coding as infrastructure, and so much more.
Like a lot of calls this reporting season, Cloudflare spoke to their exposure to all things AI.
ChatGPT is a Cloudflare customer. Cloudflare’s position as the fourth cloud, a neutral data location, is attractive to AI companies and other companies with large data sets.
Cloudflare CEO Matthew Prince stated that their newest product line (R2 and ‘Workers’), “has become the natural neutral place for these AI companies to store their training data in order to make sure it can be inexpensively and efficiently access from anywhere” and because this product is largely consumption-based, as AI sets grow larger and larger, Cloudflare is placed to grow their revenue along with that.
In fact, their largest R2 customer is an AI company and is growing at extraordinary rates as they put more data in their models. Even excluding AI, this is still a massive opportunity as they can “service anybody who is trying to be multi-cloud, which is frankly what every big enterprise today is doing,” Prince said.
Temple & Webster
Temple & Webster fell 39.58% in the Spaceship Universe portfolio in February 2023.
What does Temple & Webster do?
Temple & Webster is an Australian online retailer that sells furniture and homewares. It was founded in 2011 when four Australian entrepreneurs shared a vision to create the ‘first place Australians turn to when shopping for their home.”
What happened to Temple & Webster in February?
The negative share price reaction following Temple & Webster’s results for the first half of FY2023 was largely a response to a weaker than expected trading update about the first five weeks of the year showing -7% revenue growth.
We think this reaction was not justified given the previous corresponding period was impacted by the Omicron outbreak that led to abnormal demand for home goods – ie. Temple & Webster benefited so much from the Covid lockdowns, that it was always going to be hard for them to experience the same levels of growth once they subsided.
Instead, we are focused on Temple & Webster’s position as one of the most well-capitalised e-commerce stocks on the ASX with a superior, capital-light business model. We believe Temple & Webster should continue to gain share in an underpenetrated online category relative to the US and UK where online penetration of home goods is 28%/25% versus Australia at only 17%.
Domino’s Pizza Enterprises
Domino’s Pizza Enterprises fell 33.11% in the Spaceship Universe portfolio in February 2023.
What does Domino's Pizza Enterprises do?
Domino’s Pizza Enterprises is the largest pizza chain in Australia. Domino’s Pizza is a global brand, and Domino’s Pizza Enterprises is the Australian franchisee.
CEO of a pizza company would have to be up there with dream jobs – especially when it comes with a line of pizza credit. Financial Times analysis revealed that Domino’s Pizza (the Global parent company of Domino’s Pizza Enterprises) CEOs enjoy thousands of dollars a year worth of pizza, which they declare to their shareholders.
What happened to Domino’s Pizza Enterprises in February?
From all results this season, Domino’s was arguably one of the most disappointing while other peers such as Starbucks continued to impress in a difficult operating environment with Domino’s Group CEO Don Meij noting that “we’ve been the exception…the actual industry itself around the globe in different ways is really strong and rebounding.”
In Domino’s HY23 result, management admitted that their strategy to help offset inflation, by raising delivery prices, ended up reducing delivery acquisition and retention – negatively impacting results. This raised key questions around their pricing power and premium valuation given historical defensive characteristics.
Given management's strong track record, we appreciated their candid transparency around these execution issues and believe their comments around how they are addressing this with “flex vouchers” where they are seeing a “positive shift in momentum” despite being early days is encouraging. Flex vouchers are a promotion that lets customers customise their Domino’s order to maximise value.
Further, they emphasised that “What's really important is that this business has materially lifted in store count in the last 12 to 36 months, and we believe that as we get our pricing right in delivery and get a return to strong order count growth, we'll see a pretty sharp inflection point at that time.”
We will continue to monitor Domino’s closely and ensure that we are satisfied with the progress made over the coming results.
Looking ahead
What’s important to remember about these consumer discretionary (Domino’s Pizza Enterprises, Temple & Webster) and tech stocks (Nvdia, CloudFlare)?
The performance of Consumer Discretionary stocks is diverging between the US and Australia, influenced by the differing structure of home loans. The US consumer has been more resilient in the face of rising interest rates because most US homeowners have fixed long term interest rates typically for 30 years at low interest rates.
UBS economists estimate the share of floating-rate (variable) debt in the US mortgage is about 5%, down from a peak of around 40% in 2006. Approximately 65% of US households have locked in home loan rates below 4%. Unfortunately most Australian home loans are exposed to the opposite phenomenon, variable interest loans, which are increasing as interest rates increase.
Rising interest rates have reduced consumer budgets, affecting Australian companies such as Temple & Webster but less so for our global consumer discretionary positions.
The majority of the Spaceship Universe Portfolio’s consumer exposure is to global consumers with 3.4% of the Spaceship Universe portfolio exposed to Australian consumer discretionary, while Spaceship Earth has none.
In Technology the tremendous consumer adoption of ChatGPT has created excitement that AI will be the next computing platform.
ChatGPT has acquired more users at a similar time than TikTok, one of the fastest growing and most popular consumer apps. AI has moved from the background of recommending content (think Netflix or ecommerce) to creating content (ChatGPT). This is positive for our semiconductor stocks as content generation is more semiconductor intensive – which means, will require more semiconductors to run.
Both Spaceship Universe and Spaceship Earth portfolios have exposure to the pick and shovel semiconductor providers of Nvidia and AMD. Additionally software companies like Microsoft will also benefit by incorporating AI to improve products like Bing and Teams, using ChatGPT to summarise meetings and provide transcripts.
A note about SVB
Over the past week, Silicon Valley Bank, which was a prominent bank used by many tech startups, failed. Customers got spooked when they thought the bank wouldn’t be able to guarantee their deposits, and enough customers withdrew their money to cause a ‘bank run’.
What happened is that SVB grew deposits very rapidly during the pandemic as a lot of VC backed ventures and certain funds themselves used SVB as their bank of choice to deposit their money. As deposits surged, SVB needed to invest that money. SVB did what banks do, they bought mortgage backed securities, gave out loans, and bought treasury bonds at a time when interest rates were low.
The challenge arose when interest rates started to rise. In the past few months, the Fed raised interest rates at a rapid pace to fight inflation, which is at a 40 year high in the US. As interest rates went up, the value of these mortgage and treasury bonds dropped (bond values have an inverse relationship with interest rates).
These losses were ‘unrealised’, meaning SVB didn’t actually lose any money if they just held on to the bonds. But what also happened at the same time is that VC funding in the US slowed down. Start-ups could not raise as much money, and SVB’s deposits slowed. SVB suddenly needed to raise emergency capital, and were forced to sell their bonds at a loss (an actual loss that was realised).
This caused a sell-off of SVB’s stock in the share market, and subsequently resulted in mass-withdrawals amounting to an estimated $42 billion in just one day on Thursday, causing the bank run.
There was concern that small businesses would not get their money back, as the Fed only insures $250k worth of deposits. Customers could lose anything they held at SVB above that amount. But on Sunday, the US Federal Bank stepped in and guaranteed the deposits of the bank’s customers, both for SVB and another bank Signature Bank.
The Fed used the FDIC Insurance Fund, essentially made up of premiums paid by banks to guarantee the deposits. They did this to ensure people did not lose faith in the US banking system and prevent a domino effect of bank runs spreading to smaller regional banks in the US.
So does this impact our Spaceship Voyager portfolios? The short answer is there shouldn’t be any negative impact.
Some technology companies within the Spaceship Voyager portfolios banked with SVP; for example, the largest indirect exposure in the Spaceship Universe Portfolio was Roku, which held 26% of its cash with SVB.
However, thanks to the actions of regulators and the US government, Roku (and other depositors) will be made whole, as the government has announced that all deposits held at SVB will be backstopped. You can read more on that here.
Some of our Spaceship Voyager portfolios invest in Nvidia, CloudFlare, Temple & Webster, Domino’s Pizza Enterprises, AMD, Roku, and Microsoft.
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.
