Before we end the year, we have some updates to the Spaceship Universe Portfolio to share — we've bought Netflix, and sold Nearmap, Nitro Software, and Pushpay.
But before we get to those updates, we want to say thank you for being a Spaceship customer throughout 2022. It has been an incredibly difficult year, full of drama, for anyone adjacent to the stock market. Although inflation may have peaked, plenty of uncertainty remains — and we may well see the bumpiness continue into 2023.
We believe in the value and power of long-term investing. We know that can be easier said than done when the market drops, but long-term investors tend to live by the “time in the market, not timing the market” philosophy for good reason — because by trying to pull out of the market on a bad day, you could also end up missing out on a good day.
Some people even use market drops to put in more money and potentially supercharge their investments — although you should do whatever works for you.
Whichever direction you go in, it isn't easy, so again, thank you.
Now, onto the updates…
Bought: Netflix
For the Spaceship Universe Portfolio
Do I even need to introduce Netflix?
The streaming company, which is present in more than 190 countries, was founded in 1997 as a DVD subscription service. In 2007, it introduced streaming to its platform, and over the years that followed made streaming mainstream, taking advantage of its ability to both license content libraries and create original content.
We actually owned Netflix shares in the Spaceship Universe Portfolio when it first launched in May 2018, but we sold it in September 2019. At the time, the market was concerned about competition from Disney+ and Amazon, as well as all the other Hollywood studios launching streaming services. Netflix was priced at a premium to most other streaming services, and there was a risk of slowing subscriber growth. We found the valuation of Netflix expensive for the risk of slowing growth and exited our position.
We added Netflix back onto our watchlist when the share price fell nearly 50% this year. The market de-rated the stock and is still concerned about slowing subscriber growth, but a lot has changed in the last three years.
Firstly, competition seems to be easing, with both Disney+ and Netflix raising prices.
Disney’s growth in the US mainly came from significantly under-pricing, but in the last few months Disney+ and Netflix have raised prices, signalling that these two players no longer want to get into a price war.
Secondly, the total market for streaming has increased, and Disney had a large role to play. Disney’s growth in the last three years has been remarkable. Disney’s streaming brands (primarily Disney+, Hulu, ESPN) grew from 60 million subscribers in 2019 to more than 220 million presently. Disney almost has the same number of subscribers as Netflix (although the majority of its users are in India and South Asia through its freemium model Hotstar). But now Disney is getting more expensive, and their subscribers may consider alternate streaming services that may have more engaging content.
Thirdly, Netflix is getting cheaper. They launched an ad-supported model priced at $6.99/month instead of $10.99, targeting more price-sensitive users. Any increase in the subscription price or any revenue from advertising would help increase the earnings.
Our addition of Netflix has several other catalysts.
We believe the company has the opportunity to further expand overseas. The US still brings in more than 45% of the revenue for Netflix, and they have barely monetised outside the US, including in large markets such as Asia.
Also, Netflix is making it more expensive for users to share their account passwords, which should further increase revenue.
Additionally, while there is competition from Disney, Amazon, Apple, YouTube, NBC, Warner Bros and several others, Netflix has one of the lowest churn rates and highest retention rates in the industry.
Finally, Netflix is the biggest investor in content in Hollywood — it's expected to invest about $17 billion this year into content, well ahead of any other competitor — and it's in talks to enter into live sports.
For our Spaceship Universe Portfolio, we invest according to our Where the World is Going (WWG) criteria. We have to believe the companies we select according to our WWG criteria have future growth potential and are part of a growing trend.
We believe streaming is still a long-term trend that is gaining share from cable, even though cable still accounts for 35% of viewership in the US.
The thing is: the larger opportunity is in emerging markets, particularly in Asia, where broadband penetration is currently in the very low single digits. As the consumers in these markets get more disposable income and as broadband infrastructure improves, we believe there will be growth in streaming and connected TVs, and that could be a huge catalyst for Netflix.
We recognise the risks of slowing subscriber growth, increasing competition, and the need to continuously invest to create engaging and localised content. But we believe that Netflix is a high quality business, with a long runway of growth, available at an attractive price.
Sells
The last few months have seen a number of private equity acquirers make offers to Australian technology companies. We believe this is due to the size (not too large to buy) and reasonable prices of Australian technology companies, given stock market falls. The three stock sales from the Spaceship Universe Portfolio this quarter are all Australian companies with global businesses.
To acquire a business, private equity will engage with management and investors and add a percentage takeover premium to recent share price levels. These premiums are typically attractive in the short term, but as long-term investors, we have mixed emotions. Due to their acquisitions, we will no longer have exposure to these companies' longer term global growth opportunities.
However, this is offset by the fact we can sell these companies at a short-term premium and reinvest into investment opportunities that we believe represent better value. There is also the risk that takeover talks will fail and shares will fall back towards the pre-bid price, which occurred earlier in the year with the aborted takeover of Ramsay Healthcare.
Sold: Nearmap
From the Spaceship Universe Portfolio
Nearmap is an aerial imagery technology and location data company out of Australia.
We're selling Nearmap as it is being acquired by Thoma Bravo for $2.10 cash per share. This cash per share price was a 67% premium to Nearmap's six-month volume weighted average price of $1.26 to 12 August 2022, which was the last trading day prior to the announcement of the Thoma Bravo proposal. The proceeds from the sale were reinvested into the rest of the portfolio.
Sold: Nitro Software
From the Spaceship Universe Portfolio
Nitro is a software-as-a-service company specialising in PDF document management and e-signatures.
Nitro has received two 'change of control' transactions. Alludo offered $2 cash per share, which bettered a previous offer from Potentia Capital. The $2 cash per share offer presented a 69% premium to Nitro's one-month volume weighted average price of $1.18 prior to 29 August 2022. While the Nitro offers have not been finalised, we believe there is better value elsewhere in the portfolio, so we're selling Nitro to reinvest into other technology stocks that have not received takeover offers.
Sold: Pushpay
From the Spaceship Universe Portfolio
Pushpay is a tech-based donor management system for charities (typically churches) that operates mostly within the United States
Pushpay is being acquired by a consortium at a price of NZ$1.34 cash per share. This represented a 30.1% premium to Pushpay’s undisturbed share price of NZ$1.03 per share on 22 April, and so we decided to sell. Similar to the sales above, we believe we can reinvest the proceeds from Pushpay’s takeover into other more attractive investment opportunities.
One or more of the Spaceship Voyager portfolios invest in Netflix. 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.
