Is investor appetite for AI finally running out? Why Ranmore is looking to Asia
By Sean Peche, Founder and Portfolio Manager at Ranmore Fund Management
Heightened levels of corporate listings and takeovers have historically occurred close to market highs. US markets peaked in March 2000 during the Dot Com bubble, not long after AOL and Time Warner announced their mega-merger in January 2000. They peaked in October 2007 ahead of the 2008 financial crisis, only four months after welcoming financial giant, Blackstone, the largest listing in 5 years. And the 2021 “Pandemic Peak” was accompanied by the boom in SPAC listings (Special Purpose Acquisition Companies). Unsurprisingly, the question on some investors’ minds is whether June’s $1.8trn SpaceX listing and Anthropic’s pending ~$1.5trn listings are tell-tale signs that markets are currently peaking.
Cyclical highs occur around these events because smart entrepreneurs want to sell their businesses when markets offer high prices. Economic forces of supply and demand also play a role – the increased supply of shares from new listings absorbs buyer demand for the popular themes – markets can’t continue rising when buyers have run out of cash to buy. In June, SpaceX raised $86bn from investors and Alphabet raised $50bn. Intel raised $23bn in August and Meta raised $37.5bn in October, all satisfying investor demand for the AI theme. We think it was particularly relevant that in late October, ChatGPT owner, OpenAI raised “only” $11bn of their targeted $30bn AND at a lower valuation of $1.25trn vs a target valuation of $1.4trn (Source: Wall Street Journal). Perhaps investor appetite for the AI theme is finally satiated.
Nevertheless, while concerns of a market bubble might matter for investors with exposure to large, concentrated indices, it matters far less for investors in our fund with only a 2% overlap with the MSCI World Index (98% active share). Furthermore, investors have broadly been selling non-AI related companies to invest in AI themed stocks and ETFs, thereby creating some wonderful investment opportunities at knock down prices for investors like us.
Our investors know that we care little for benchmarks and “tracking error” – we fail to see any appeal in wanting to “track” an expensive, highly concentrated index. Instead, we’re guided by where we find Value which is currently in Asia.
To illustrate the valuation differential between US and Asian companies, let’s compare Spotify and Tencent Music (Chinese equivalent).
Spotify has a market value of $126bn and holds $10bn in cash and investments (8% of market cap). They earned $3bn of net income over the past year so is trading at 42 times trailing earnings (39x earnings if you adjust for the net cash)
Now consider Tencent Music, which we hold. The company has a market value of $16bn but they have $2bn of net cash AND another $6bn in securities (they own 2.5% of Spotify and 2% of Universal Music). If we bought the entire company today and sold Spotify and UMG at current market prices, we’d be paying $8bn for core Tencent Music which earned $1.3bn over the past year. That means we’re essentially paying 6x earnings vs 39x for Spotify and we have the margin of safety of a large cash and investment securities balance, limiting our downside – useful in turbulent times.
This asymmetrical investment opportunity hopefully explains why we aren’t too worried about any potential US market highs.
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