We've made a bunch of changes to our Spaceship Voyager portfolios this past quarter, including some swipe-worthy additions (Bumble).
Let's get into the reasons why…
Bought: Bumble
In the Spaceship Universe Portfolio and the Spaceship Earth Portfolio
We're swiping right on Bumble, the popular dating app started by Whitney Wolfe Herd in 2014 (after leaving Tinder). Personally, I can vouch for Bumble, as it's where I met my boyfriend. Fun fact: I can also vouch for its reach; a few years ago, a reader of this very newsletter sent me a message on Bumble, asking "Aren't you Bryna from Spaceship?"
But that's not why we like it at Spaceship.
Bumble is a unique platform because it prioritises women, and it's not just for dating — it's a social network. Moreover, it's the second largest online dating app in the US in terms of annual active users, with nearly twice the average revenue per user of Tinder (as of last quarter).
The company is driving monetisation by testing different price points. Currently, less than 5% of Bumble’s users pay for the service, which is why they’ve launched initiatives to improve monetisation. For instance, Bumble cost more than Tinder, but Bumble is now testing different price points (both lower and higher, to target a wider range of users).
Bumble is also driving growth outside the US through a localised approach, targeting local micro-influencers to help with marketing.
On top, the company is making improvements to the product (e.g. launching features such as 'Compliments'), is launching an interest-based social networking app called BFF, and has other apps in its entourage (Badoo and Fruitz).
While we believe the market is concerned with slowing user growth, we believe online dating is a long-term and growing secular trend. The market is competitive, but few players can reach the scale of Bumble. Bumble has a high single-digit free cash flow yield, the business is cash-generative, growing, and available at a reasonable valuation.
With a strong product roadmap and a visionary founder to boot, we like what we see.
As for why we bought it for the Spaceship Earth Portfolio specifically, we believe Bumble contributes to Goal 5 (Gender Equality) of the UN Sustainable Development Goals agenda, as Bumble is a business focused on empowering women. Internally, it puts its money where its mouth is too; 70% of its board is female.
Bought: Arista Networks
In the Spaceship Universe Portfolio and the Spaceship Earth Portfolio
Arista Networks is a computer networking company founded in 2004 by three former Cisco executives. The company pitches its high-speed product as "hardware built for the cloud with the software to manage it."
What this means, in less fun language, is it creates cloud network solutions (switches and routers) for large data centres and computing environments.
We like Arista because growth in data and artificial intelligence increases the need for network efficiency, with switches needed to speed up communications among racks of computer servers, for example. The company is winning market share against its competitors (which include Cisco, interestingly). The Spaceship Universe Portfolio and the Spaceship Earth Portfolio already include AI-related exposure through semiconductors (e.g. Nvidia), but we felt it important to add a company with exposure to networking, which should benefit from what we believe will be a large and sustainable increase in data. Greater AI usage necessitates constant data transmission back and forth across networks as well as generating additional data through the likes of services like ChatGPT.
As for why we bought it for the Spaceship Earth Portfolio specifically, we believe Arista Networks contributes to Goal 9 (Industry, Innovation and Infrastructure) of the UN Sustainable Development Goals agenda. The company builds high-speed communication equipment which is essential infrastructure.
Bought: Nu Holdings
In the Spaceship Universe Portfolio
Nu is a bank, but not just any bank.
By the numbers, Nu has 85 million customers in Brazil, Mexico, and Colombia, making it one of the world’s largest digital banking platforms in terms of active users. It's the fifth-largest financial institution in Latin America when measured by number of active customers.
Nu launched with a credit card in 2014, but growth took off during the pandemic, during which Nu multiplied its user base many times over.
Nu has had several tailwinds fuelling this growth, not least of which is that interest rates in Brazil went from ~2% in Q2 2020 to 13.75% in July 2023! Nu passed on the majority of these high rates to customers and attracted US$18 billion in deposits as of 30 June 2023. Nu also made it very easy for customers to open a bank account and won more than 40 awards in 2022 for customer experience and product innovation.
Nu has also ramped up personal loans with strong positive unit economics (meaning customers are willing to pay more than it costs to serve them), launching products such as lending to public sector workers in Brazil who tend to have a lower default rate because of their work stability.
We recognise the risks of user growth slowing and the risks that Nu has not been through multiple credit cycles compared to legacy banks such as Itau. However, with around 58% of customers using Nu as their primary bank account, Nu has the potential to be an important financial partner for their customers. For example, a large portion of Nu’s customers are under the age of 35. As these customers grow their disposable income over the coming years, Nu can cross-sell financial products (such as credit cards, insurance, etc.).
As of 30 June this year, Berkshire Hathaway, owned by one of the world's most famous investors Warren Buffett, owned 2.3% of Nu Holdings stock.
Sold: Snap
From the Spaceship Universe Portfolio
We believe Meta's shift towards artificial intelligence (rather than the metaverse) poses a risk to Snap. Meta is aggressively focusing on WhatsApp click-to-message, a differentiator compared to other social media advertisements.
We initially believed Snap could close the 'per user' pricing gap with Meta, thanks to its augmented reality shopping features, but this has seen slow uptake. Given Meta’s increasing value-add through messaging, we believe the pricing gap monetised per user will not close as we initially thought.
As such, we've decided to reallocate capital towards Bumble, whose management has a demonstrated history of delivering on profitability and growth promises.
Sold: Spotify
From the Spaceship Universe Portfolio
Spotify is an incredibly popular music streaming service, loved by millions — it has a staggering 551 million monthly active users, to be exact. While Spotify's product is impressive, we have started to question whether it qualifies as an excellent business.
Our initial belief was that embracing podcasting would not only boost usage but also diminish the influence record labels held over Spotify. Although we have observed an increase in usage, the podcasting side of the business has demonstrated unsatisfactory returns, exemplified by ventures such as Meghan and Harry's podcast venture.
Additionally, we have growing concerns regarding the potential impact of TikTok's new music service, TikTok Music, which is currently in beta testing in Australia. While we acknowledge that both services can coexist, with TikTok focusing more on music discovery, there are inherent risks to user engagement, as TikTok Music seamlessly integrates with existing TikTok accounts.
Further, we worry that TikTok's entry into the music streaming arena will erode Spotify's negotiating power with record labels.
Though specific details remain undisclosed, Spotify reportedly retains around 30 cents of every dollar from subscriptions, with the remainder flowing to major labels and publishers. We initially thought that as Spotify expanded its presence in the podcasting realm and grew users, it could leverage its position to reduce payments to record labels. However, TikTok's arrival has cast doubt on this investment thesis. Consequently, we have decided to divest our holdings in Spotify.
Sold: Chewy
From the Spaceship Universe Portfolio
Our initial investment thesis for Chewy hinged on the anticipated benefits of increased pet adoption and pet healthcare services. Sadly, up to one-third of pet owners reportedly don't seek regular veterinary care for their pets, and Chewy aimed to address this through services such as pet telehealth, pharmacy offerings, and prescription services.
While some aspects of our thesis still hold true due to the surge in pet adoption during the pandemic, the thesis is now being challenged by declining user growth and the company's shift toward prioritising international markets such as Canada for its expansion efforts. This means the primary focus is no longer on pet health, which has proven to be a challenging transformation.
We originally assumed that the United States had several more years of growth potential, especially in the pet health sector. However, the fact that Chewy is accelerating its international expansion plans challenges this growth projection sooner than we had anticipated. Given the company's lower-than-expected growth rates and the accelerated international expansion, we decided to divest our holdings in the stock.
Sold: Doximity
From the Spaceship Universe Portfolio
Doximity's growth has slowed in recent months. Its August results revealed the company had given up some market share to a cheaper online competitor. As a result, Doximity retrenched around 10% of its workforce, and announced the need to invest in a self-service advertising product.
It's the latter revelation that caused the most concern; management believed the current people-intensive contracting system was needed for the healthcare industry, which is more highly regulated than others. Yet customers are demanding real-time auction-based advertising that can be adjusted quickly rather than the friction of Doximity's annual pre-agreed spending commitments. As a result, Doximity needs to upgrade and improve its internal systems.
We are concerned the transition could take longer and cause more disruptions than Doximity is expecting, so we've sold out of Doximity.
Sold: Domino’s Pizza
From the Spaceship Universe Portfolio
We have been monitoring debt levels within our investment portfolio, particularly in light of the prevailing "higher for longer" interest rate environment. While our Spaceship Universe and Spaceship Earth portfolios maintain a net cash position overall, we re-reviewed individual investments that carry debt levels that may not have adequately accounted for the potential persistence of higher interest rates.
Our initial assessment suggests that Domino's leverage levels remain within manageable limits. However, its leverage has been primarily driven by a strategic emphasis on share buybacks to deliver value to shareholders. Historically, this approach has contributed significantly to value creation, reducing the overall number of shares. However, in light of the current interest rate landscape, we have reservations about the sustainability of this strategy, given its reliance on debt re-leveraging to buyback shares.
We also hold an investment in Domino's Pizza Enterprises (listed on the ASX as DMP), which carries its own level of debt. However, its strategic approach to managing debt differs from that of Domino's in the US, as it does not consistently pursue a strategy of re-leveraging to buyback shares. Given our dual exposure to the Domino's brand, we believe it is prudent to reduce our exposure to the US-listed Domino’s.
Sold: Kering
From the Spaceship Earth Portfolio
When we added Kering to the Spaceship Earth Portfolio (upon launch of the portfolio in November 2020), it was because we believed Kering had a strong ESG stance and high sustainability standards. For example, in 2021 Kering placed seventh out of 8,080 companies around the world for sustainability and topped its sector in the Corporate Knights 2021 Annual Global 100 ranking. That was the fourth year in a row Kering was ranked first in the Clothing and Accessory Retail category.
But we currently believe this is not enough given Kering’s large exposure to Gucci — the major brand in Kering's portfolio — which is now seeing slower growth. Kering is not as diversified as some of the other luxury fashion houses, and given its high reliance on Gucci, which is slowing, we decided to sell out of Kering.
Sold: Vestas Wind Systems
From the Spaceship Earth Portfolio
Our investment team has decided to prioritise solar energy over wind exposure within the Spaceship Earth Portfolio. This is because we believe solar energy has more favourable economics than alternative sources such as wind.
We also have placed a strong emphasis on eliminating companies with low gross margins, and we felt Vesta was in that category, with an 8% gross margin this year coupled with a substantial debt-to-EBITDA ratio.
Sold: American Tower Corporation
From the Spaceship Earth Portfolio
American Tower Corporation has some of the highest leverage and portfolio weightings within the Spaceship Earth Portfolio. Typically, to obtain a favourite tax status (ie no corporate tax), a US-based Real Estate Investment Trust (REIT) must distribute 90% of cash flows. American Tower generates substantial cash flows but they cannot be used quickly to retire debt. When we reviewed American Tower's debt schedule, we felt we were better placed to swap American Tower for Arista Networks (which we wrote about above).
The Spaceship Origin Portfolio
For customers in the Spaceship Origin Portfolio, things are a little different.
The Spaceship Origin Portfolio is made up of around 100 of some of the largest ASX-listed companies by market capitalisation, and around 100 of some of the largest global companies by market capitalisation.
If a company moves in or out of the Spaceship Origin Portfolio, it will generally be because its market capitalisation has changed, not because we have decided to buy or sell it.
One or more of the Spaceship Voyager portfolios invest in Arista Networks, Bumble, Nu Holdings 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.
