In 2020, while the economy was ravaged by the pandemic, several big tech companies did extraordinarily well. Names like Apple, Facebook and Alphabet proved to be extraordinarily resilient. While other companies like Amazon, Netflix, Zoom and Peloton got an extra boost due to changing consumer behaviors. So what’s next for tech? On this episode, we speak with Ram Parameswaran, the CIO and founder of Octahedron Capital to discuss what he learned about tech during the pandemic and why he is so bullish on the space. You can listen to the episode here. Transcripts have been lightly edited for clarity.
Hello and welcome to another episode of the Odd Lots podcast. I’m Joe Weisenthal.
And I’m Tracy Alloway.
So Tracy, you know, we talk a lot about some of the big trends of the last year. We talk about housing. We talk about various commodities that are in short supply. We’ve talked a lot lately about cryptocurrencies. But the other big theme of the last year was just like the incredible power and performance of big tech defined broadly. I mean, it was just an incredible year for huge tech companies. And e-commerce absolutely.
It’s kind of weird because I’m thinking back to 2020, and this was the big story in markets. It was the outperformance of these stocks and how everything had just rotated back into these big tech companies. You know, Netflix was doing incredibly well because everyone was sat at home watching movies. There was all this talk about how the Covid crisis had basically reoriented our lives even more towards tech. And now we’ve come out the other side of it. And there was some talk about the rotation into value, things like that. But I think in general, the big tech stocks have held up remarkably well, right?
Yeah, they’re doing really well. I mean, the stocks, you know, they maybe they aren’t as hot as they were a year ago at the time, but the companies are still doing very well. So you know, I think even with the “normalization” of the economy, it does not seem like there is some sort of like shift away from tech.
And I think there’s kind of two things going on. I mean, one is Covid, you know, obviously forced certain economic behaviors to go more online — Okay Zoom Video, a company like that obviously replaced a lot of in-person activity. We’re talking over Zoom right now. And then the other thing is of course this other theme, which is like the sort of great acceleration thesis, which is that all the trends going into the crisis seem to have just gotten like magnified in five years, got condensed until one year.
Yeah. And I think that’s probably what we’re seeing right now with tech. I mean, this idea that we’re all going to go into remote working. Okay. Maybe we’re not all going to work from home forever, but there might be some sort of hybrid model. We’ve all gotten very used to ordering stuff off of Amazon.
But that said, even though we talk a lot about the acceleration of trends that may be beneficial to tech, there are some things coming up that could potentially be challenging. So, you know, for instance, we talk about the bottlenecks, the shortages, what do those actually mean for, I don’t know, a company like Uber, right? Is it going to be able to get enough drivers? Are we going to see that backlash against big tech from DC? There are certain things coming up that could be problematic.
Exactly right. Well, anyway, I’m very excited about speaking with our guest. We are going to be speaking with an investor in tech who has a very big picture approach — big ideas — and concentrated bets in the space. Someone who really sort of thinks deeply about where it’s all going, and who will be the major winners. I’m excited to welcome to Odd Lots Ram Parameswaran. He is the founder and CIO of Octahedron Capital. Ram, thank you so much for joining us!
Joe and Tracy. Thank you for having me. It’s a real pleasure.
Yeah. This is a super exciting, very excited to talk to you. How do you describe Octahedron? Because it’s not like the typical fund. I know you have a handful of concentrated bets, but how do you describe it exactly? What is the structure of the fund and your general approach to it?
Well, thank you, Joe, for having me. So let me start with the very big picture, the top down, which is, you know, what our mission is. So our mission is very simple and we simply want to be the absolute best partner for the world’s internet scaled businesses. So what does that mean? So I’ve been obsessed with this idea of internet scale for almost a decade.
Since I started working after business school at Sanford Bernstein where my boss and I co founded the internet team there. And we were quite well known on wall street for a couple of years, because of distinctive work on Amazon, where we kind of discovered through math and bunch of our other analysis that hiding inside a 5 to 6% retail margin business, we’ll see a 30% margin cloud business. We helped defend, you know, Google through the transition from desktop to mobile.
And what I started realizing was, you know, when investors start thinking about the traditional offline market, we just have a very narrow definition of TAM, which I have made so many mistakes off in the past. And in fact, one of my biggest mistakes in life is having narrow definitions. But that’s number one. Number two is I’ve started realizing and learning over the last decade that these companies started to get bigger and better over scale, but then they become these humongous.
They brought these humongous revenue scale numbers that an early investor cannot comprehend. And number three, there are niches that are riches in niches that I did not expect. If you think about the internet being 30 years old, if you think about what is, what actually flows through the internet, even thinking about net income on internet companies, as a percentage of total global net income, or even you think about what’s the total market cap, excluding Apple across total global market cap, by all those all ways, you know, we size it to be less than 10%. And let that sink in for a second.
The internet is ubiquitous in almost every way, and think about it, less than 10% of total global value gets accrued to the internet. So over the next 20 or 30 years our bet is that whether it’s internet companies, or traditional content marketplaces, on demand businesses, or whether it’s the stuff that lubricates the internet, which happens to be payments companies and certain software companies, you know, we think that this convergence of obviously ubiquitous computing, ubiquitous connectivity now ubiquitous democratization of knowledge, with ubiquitous location, will get us from that 10 to 12% range to 50 to 60% in our lifetimes. So the mission is let’s be the best partner to these internet scale companies. And that’s what we do.
So I have a lot of questions already, but just on this idea of being the best partner to internet scale companies as possible, my impression, and I think a lot of people’s impressions of the space is that there is a lot of competition to give capital to the next big thing. So, you know, obviously on the West Coast, there’s a bunch of people in venture capital who are fighting to find companies to up and coming companies to invest in how competitive is the space in your mind and how do you go about differentiating yourself from everyone else?
It is indeed competitive and it’s just gotten more competitive historically, but this is the way we distinguish ourselves. So number one, you know, Joe mentioned a very important point at the beginning, which is concentration. So as a fund, you know, we believe in a centralism, we try to constantly rank order the best ideas and our risk reward basis publicly and privately. So that forcing function does not allow us to spray and pray. The impact on the private markets is that on average per year, Octahedron makes between, I’d say between two and four investments totally in the private markets. Number two, we are not VCs. We don’t take board seats. We actually co-opt with some of the best VCs in the world who are all, many of them whom are investors at Octahedron. And the value that both companies see from a firm like us, which just true native crossover is that one, we don’t have 20 different companies to look after we today we have six private companies.
We recently just today invested in a company called Fair whose announcement went out today. What that does for us as we can work for every company is very important to us. So what we can do is our mission is to not only help those companies scale into the public markets over the next two to three years, which is kind of our sweet spot. We don’t do early state stuff. That’s where other VCs and other board members, but then how do you also stay public or stay successful in the public market? And the average other fund has competing for capital in the late stage, they are typically trying to build an index of everything going public. So that’s what I would categorize a spray and pray approach. And so I would say that just the craft we create around, do a few things, do it really well, go really deep take care of every management team, because it is a really important part of a portfolio is I think what distinguishes us from other capital out there. And there are some fantastic companies that are involved in the private markets, but again, you know what I’ve learned over time is this is not a zero sum game. It’s so infinitely large and it’s so infinitely big. There are so many opportunities for everybody. So we’re in the business of effectively playing non zero sum games. It’s not us worth to somebody else it’s us and everybody else.
Ram, we talked about this idea of like, obviously the last year has been particularly extraordinary and you put out these presentations of like things you’ve learned. And do you know, I’m, I’m curious of what your takeaway for tech is from the last year, like was last year a period of which our lives temporarily changed. Are there permanent changes? Like what is, what did you think about tech going into last year and sort of like, what’s your, what have you learned? Yeah. What have you learned?
Yeah. And I think this is probably the most tumultuous event we’ve all faced in our lifetimes. I launched this fund in April, 2020, and it was so confusing and dark and that we all know we were flying blind. Now I’ll be honest that we did not know what was going to happen. In fact, the deck, you were referencing called A Few Things We Learned came out of that confusion because when I started this fund with one analyst and $10 million in AUM, and we’re obviously much bigger now, we were completely confused. Like what just happened? And what do we make of this? And you know, all the credit card panel data we buy and the tracking we do of absence downloads and scale, it all went, you know, haywire, right? The numbers are all over the place. We weren’t quite sure.
And that’s how you put it, put the deck we read. We said, “listen, we read a hundred transcripts. And so let’s put it all together in a format and the format.” And we just gave it to the world because we figured that it we’re facing. If we’re so confused, a lot of other people are confused as well. So that’s an interesting side note on this.
This deck did not happen completely by mistake. So what did we learn? Number one is we’re fully convinced that the world has changed forever in almost every single way, but within that there are nuances. And it’ll be interesting to see what happens in the next three months when we normalize with very difficult comps from last year. Let’s talk about the top, which is digital advertising. Digital advertising is now the only way by which retailers and businesses can get a hold of consumers, which is why, if you think about 2021, the numbers have been off the charts, whether it’s Google or Amazon or Facebook or Snapchat or Twitter, or by dance in China, the numbers are just off the charts because how else now people have been quarantined and quiet and staying, you know, basically stayed low for an ear.
How are you going to acquire? And re-engage all these billions of consumers who are not going to be out traveling and partying and eating out and just going about the normal lives and probably having revenge spending over the next, you know, 12 months. Well, and obviously this winner is digital advertising and the scale and engagement and tools and the importance to the economy cannot be should not be underestimated. That’s number one, number two, the world of SMBs, you know, the longest time we’ve had a thesis. In fact, when we think about investing in internet scale software, SMB software is right in the middle of our wheel house. And for the longest time, it was just difficult to invest in SMB in the SMB space, mostly because the mortality, you know, over the last year, it’s taken a life of its own.
And if you, you basically break up SMBs by services and non services or retail or people that sell stuff, we’ve just seen this explosion of — one big picture, lots of entrepreneurs and lots of companies being built, right? The base of new business formations has been an unprecedented and therefore the use of software, whether it’s payment systems like Brex or whether it’s you know, supply chain solutions like Fairor the use of payroll systems like Gusto and Rippling, or you look at software that digitizes retailers like Shopify has been unprecedented, right? Because you’ve got all these companies turning on and they’ve all been given the same tools that allows them to compete on the same, but the same tools and services and products that the largest retailers in the world half and even better because digital advertising gets you out to billions of consumers.
They have a shot at advertising, get other consumers with the same level playing field, the largest companies in the world of hat, which means that this COVID crisis has created this sort of weird equalization mechanism for SMBs. Now it doesn’t mean the big companies have been left behind in retail. What we’ve seen is whether it’s Walmart or Target.
And there’s a really interesting have, and have not scenario here, the Walmarts, the Targets in the world of William Sonoma’s, the Nike’s in the world have taken this crisis and they now have significant material portions of their revenues being implemented via e-commerce and all the investors they, they made historically e-commerce including innovations and buy online pickup and sharp cup site pickup, you know, directly integrating with APIs like DoorDash, bringing on Instacart for local delivery. They just turn everything on at scale and it’s just worked wonderfully for them.
So you see this have- have not behavior and moving down the stack a little bit with an e-commerce again, because everyone has focused at time online. We’ve seen this explosion of alternative shopping mechanisms. Cause I know you mentioned Amazon at the beginning. Amazon is now not the only game in town and everybody in some ways are gunning for Amazon’s market share though Amazon itself is doing really well as you’ve seen from that numbers, but everyone is gunning for some version of Amazon.
So what have you seen, you know, niche vertical places, just scale and do really well and come to a point that Amazon can’t really touch them anymore. These are examples are Wayfair, for example, Etsy’s a second example. But if you look at the private companies, two companies have I’ve been really intrigued by and I met the management teams last week. It’s a company called Curated and Curated allows you to go and buy higher value items like skis and camping gear and cycles the stuff you would go to an REI, you spend an hour there, go buy a bike for yourself.
You probably got 20 bikes on the rack to choose from. And then you got to go pick it up, pack it and go home, which is kind of a difficult experience. Curated brings that online. And I actually used it, my wife and I used it last week and it was just a wonderful experience.
The other product — the other niche we see — we see is all sorts of video based shopping. And of course this is a trend that started in China and it’s very popular there, but I suspect that lots of video improvements and more, more like experiences with an apps are going to come to the fore and take us away from the boring Amazon experience to a more kind of interactive fun experience.
So a lot of changes happening. And then one last area I want to, I want to touch upon is, is just on demand. And this is, you know, Tracy, you alluded to Uber earlier in the conversation and we’ll come to that in the bit between Uber and DoorDash and possibly to a lower exit Instacart in the US and almost every single company in other parts of the world.
I mean, we’ve, this has now become indispensable for many, for many people’s lives, right? So if you DoorDash, for example, the just had an unprecedented kind of explosion in their overall business over the last 12 months. And what’s funny is we track the data every day, week and as shockingly, it sees, there’s no evidence of slow down. Now you see some slowdown and UberEATS, for example, and a much deeper slowdown on Postmates and a pretty drastic slowdown on Instacart, for example.
And I can explain that away by a few mechanics, but, you know, DoorDash by layering on products first, delivering, you know, food to you now delivering convenience products to you now bring on a marketplace with groceries and Safeway coming on board. They’ve done a really good job layering on products in the overall ecosystem, but this is a worldwide phenomenon, right?
Whether you see Rappi in Latin America or grab in Indonesia and, and, and Southeast Asia or Coupang in Korea on demand systems are here to stay. And, and reason I bring up on demand is Amazon built this humongous business, still growing at unprecedented rates, by price, selection, and convenience, and all these on-demand companies are gunning for that convenience part. And Amazon, I think over the next two to four years needs to really figure out how they bring that convenience factor down from one day to a few hours.
I want to dig into a lot of these different business models, but there’s one thing that you said that caught my attention, which is that you launched the new fund in April of last year, given how you’re making concentrated bets. I guess I’m just curious what it was like actually launching the fund at that time period and whether or not, I’m not sure how to phrase this, but you know, if you’re only investing in six companies, it feels like a lot of pressure, particularly at a time when people were talking about how this was an unprecedented crisis, no one really knew what was going to happen. There was a lot of uncertainty about the future. How did you actually go about doing that and deciding on where to place the new money?
Yeah. So there were, so just to be clear, I remember we made six private investments over the last year. So the sixth number was the number of private investments over the last 14 months. We, you know, on the public side, we typically invest between eight and 12 companies at a point in time. And everything is all, it’s all about risk reward at a point in time in a specific company. So our business model, Tracy, it’s very different compared to the average fund where in the average fund I worked in the average fund, I know off you tend to become what I called an ambulance to the week. So you’ve got to pitch ideas every couple of weeks, and then you pitch it to your PM and hopefully it goes to your book. We have we’ve taken the opposite business model is something I learned at Altimeter.
When our boss, prior to this as a firm, we only cover between 40 and 60 stocks. And I have an analyst team of four people now, and every analyst covers between 12, let’s say between 10 and 12 stocks, how do we pick these stocks? Because that’s a collective knowledge of, you know, four or five of us between us have, you know, 40 years or 30 years of experience, right? So you kind of know where the world is going to. And the expectation per analyst is to become amongst the world’s best analysts in those 10 or 12 stocks. And we have a very kind of like common format and the way we think about our driver trees, the way we build our models, the way we think about valuation. And so as a PM my analyst team makes it really easy for me to pick and choose between companies based on the risk reward at a point in time.
But I’ll tell you last year in April was a difficult time. And it was very difficult, mostly because the markets, if I remember troughed on March 23rd, and by the time we got dollars in our BB account on April 15th, the markets had rallied almost 31%. If I’m not mistaken, it was just tough guys because you know then my favorite companies were up 110% by the time I even got my first dollar. So luckily for us, there was no pressure from our LPs who to go deploy capital immediately. So we could take almost a month to slowly deploy dollars one by one by one, there was no reason to go put all our money, you know, at one point into the market. So we took our time and I think we kind of like led our way in over almost two months. And then by June, when we got so much more clarity about the world, we were able to kind of you know, be fully invested.
Of course, this is not a static game. Cause you know, we raised money pretty rapidly through the crisis. And today we’re getting closer to $150 million in AUM. So the hard part is, you know, how do you keep up? Right? So there were challenges. There were three or four moving parts. One is the markets were moving and there was no way any of us could have even anticipated the multiple expansion that happened last year, right? These companies, which is beating numbers by epic proportions, like the world changed so rapidly, even they were not able to keep up. And you mentioned a little about, you know, the, uh, you know, the, the challenges with acquiring supply for Uber, but all that was true. So Uber had a demand problem first and now have a supply problem, but it will all eventually, you know, be good for them.
Once the demand and supply works, Uber is going to be an explosive stock in my opinion. But number three, you know, we were raising capital. So each time money came in, we were like, man, we have all this new capital. What do we do with it? So it wasn’t easier, you know, anybody who tells you to starting a fund, as easy as obviously, you know, it’s too optimistic in life, but we had it particularly hard. So I’m actually quite grateful that we kind of made our way through the process. But by June and July, when we finally got our footing, when we knew what we wanted it on, we kind of realized that the numbers were going to be much bigger than what we originally modeled. You know, three or four months ago when we, they were in a pre-launch phase, we were able to play the game better.
And then of course the hard part last year was I think in the month of November, the month of August, we had, you know, pretty gnarly corrections and the NASDAQ, because that happens in a bull market as well, you know, but you know, nine months in, you know, by the end of the year, I felt like we were, we were in a good place and we kind of knew we were seeing the ball big and we were able to take some big bet. So, you know, between legging in, being slow, being careful, not being greedy immediately, and frankly just not getting FOMO’d out, I think that’s how we survived year one.
So Ram, you mentioned high valuations there, and this is the thing that comes up consistently with tech investments. You know, people like Amazon, people like Uber, but maybe they don’t like it at the current multiples. How do you get comfortable with those in the tech world and how are you thinking about them?
Every quarter we put up, we have an internal growth index or software internal growth index of internet, which we published a few days ago. So number one, I would actually argue that companies like Uber and Amazon are actually extraordinarily cheap. They’re actually very cheap.
So first of all right, let’s level set here, stocks in general are very expensive, right? There’s no easy deal available to the market right now to buy things. Some stocks are incredibly cheap, but not everything’s expensive. So to break it up, cause LPs ask me this all the time. So number one, let’s talk about software today, software today, you know, high growth software, our index, and, you know, trust me on our index. But you know, it trades at 20 times revenues, right?
And the historical five-year mean was, was 11 times. And the pre COVID number was like 15 times. So it’s, even though we’ve had a software correction, the reality is that there are great companies like Snowflake out that and great companies like CrowdStrike, but it’s very hard to underwrite companies to 50 times revenues. You have to take a very, very long view. So there are still some companies that skew the average in a in a pretty epic fashion, but it’s software is not cheap by any definition. Now we’re actually quite nervous on software. We only own two software stocks, but generally software’s really expensive.
Then second we have payments payments, same story. Payments is the new software. And in fact there’s probably even higher kind of like crazy valuations happening in payments. Marketa just went out of a couple of days ago and that was nosebleed and DLocal went out a few days ago and that was expensive, but they’re all phenomenal companies and Dlocal, especially as I think doing an exceptional job.
So those are the two. So again, within software and payments, we’re very careful. We only own zoom and Twilio in software. And we can talk a little bit more about that. But in, at, in payments we own smaller positions, but when it comes to internet, you know, I wanna, I wanna push back on valuation. So first of all right, you talk about software being valued on a net revenue basis. You know, internet, our framework is we think we, for every company we cover, we have a view on what we think long-term EBITDA looks like, and we build an index around it. It turns out that, you know, at 31 times a long-term EBITDA and our index it’s, it’s, it’s expensive compared to the five-year median, but the five-year median for that was 23. So you get 8 or 9 turns above what that is, but that is skewed by companies like, like Airbnb, for example.
But if you take in that companies at the very bottom, the mega caps, whether it’s Facebook, whether it’s Google, whether it’s Alibaba and Amazon, they’re not just cheap. In some cases they are ridiculously cheap and all Chinese companies are cheap right now. So China’s a big focus for us. We own both shares and buy dance and shares and PinDuoDuo and shares Alibaba in size because those stocks are beaten down, not on fundamentals, but on overall worries on regulation.
You take the next leg up, which is the large and mega cap internet companies, Facebook, Google, Amazon. Those companies are going to grow north of 20% for a very long time. And this year it’s going to be, it’s probably the best year for advertising in the history of me covering these stocks. Why? Because the entire world is coming online again and they have to go and acquire customers on Facebook and Google and Snapchat and Twitter.
There’s no other choice, right? Where else do you go? So those stocks look extraordinarily cheap and, and Google, you know, we own a lot, a pretty large position in Google. And the reason for that is because they have multiple ways to win, including search, which is doing really well, turning on ads in maps. YouTube is absolutely killing numbers. And oh, by the way, after Thomas Kurian took over Google Cloud two years ago, he’s done an A-plus job in restructuring the cloud business in his go to market and sales. So we’re seeing evidence of real sales motion and and wins in the cloud business. So many ways to win at Google, especially the third stack on top of that is, you know, single name and ad companies are, or those are expensive. So we own smaller positions in those, like for example, you take a company like Carvana, phenomenal asset, slightly expensive, we’ll grow faster, see up probably beat numbers.
But within this category, you’ve got some very cheap companies. And one of our biggest positions is Peloton, right? So that the operate surely in internet, this is very simple to me, just like Zoom in the public markets in software. There are people that basically assume that once COVID goes away, we will all return to normal. People have beaten down the stocks of Peloton because “Hey, you all go back to the gym” and people are beating down the stocks of others because anything, the world will recover and nobody’s going to go and buy stuff on Amazon anymore. That does not make sense. And so my point is, as you go up the stack, the smaller companies, there are pockets of overvaluation for sure. And some companies, some companies are not cheap like Airbnb, for example, but in almost every other case, internet stocks have real value today. So let me stop there.
No, I’m curious like timeframe. I mean, you know, you mentioned that there were a few tech draw downs over the last year for several months, several parts of this year, there did seem to be some sort of compression in some of the tech valuations as the reopening happened. What do you, do you think about sort of like macro conditions that’ll cause either people to rotate in or out of tech or is it still just you’re focused on tech and you can’t do anything about the sort of the broader macro?
So listen, I mean, I am not a macro person, but you know, it’s foolish to say that we are not keenly aware and keenly understand, you know, macro that could hurt our companies. Right? So we, we keep an eye on macro, but we don’t create other companies on the back of macro. The reality is that these companies will grow earnings between 20 and 25, maybe 30% for the next decade. Right?
So on the one hand we can kind of sleep well by the fact that if we just went on vacation for two years and all this macro and this law short-term correction went away, we’d come back. And these companies would be, you know, two times the size of the world, we left them. Right. So we can, we luckily, you know, when you invest in and they only invest in secular growth businesses, we kind of have that real deep safety net that if we did nothing and we were just foolish, right?
I mean, just invested in a, you know, two or three years out, these companies are going to be far larger businesses than they are today because the only thing we don’t, we should not do and be careful of is we should not be greedy and get overly FOMO’d to chase momentum and pay any price, but when you pay it and, and we’re very lucky at this point in time, thanks to the correction in January and then the correction in March and the deed correction in may.
And I’m sure a connection is going to happen again, sometime soon, all we have to do is make sure that we serve the way well and use these pockets of pain to, um, you know, start, keep collecting our favorite assets and also make sure that when we have short-term euphoric moments like we had gosh, two weeks ago, and then, you know, in the month of February, we are appropriately sober.
So there are two worlds of thought here. The one world has taught us, just put money to work and we’ll all be fine in the long-term. The second worldview is, you know, because we do such few things and we’re actually quite good at these stocks. We should be able to do risk management on a post-hoc basis, better than most people. So our strategy and philosophy is when stocks are, we we’re getting paid two or three years and advance, but we should not be greedy. We should take some risk off the table because the market we’re actually very happy, cultivating, dirty secret last year was a phenomenal year for us. And we’re very lucky to be launched in 2020, despite our difficult start. The reality is all through last year, I was troubling was modeling because each time I taught something was too expensive, it kept going ahead of me.
So we were constantly felt pressure to chase momentum and we did not, but there was always this paing that man, you just missed it again this year, while obviously we’re still, you know, thankfully we’re doing quite well for the year. The reality is this feels like more of a normal year, but more punches in your face if you know what I mean. So at least this year, we have shots to take, to buy good assets at a decreased prices. Number one, if you believe in, again, all our stocks, we have a variant perception on our numbers looking out three years and for the quarter and for the air, but on the other, you know, we have shots to take risk off the table. So this is going to be an EO where I think we surf the wave versus trying to be heroes.
So I would say that coming out as I think the next three months, Joe and Tracy, are going to be particularly hard because we are going into high inflation months with easy comps over the last year. And we are going into the peak of this will be a lot of tension about, Hey, you know, yes, we believe so the world still thinks many of these companies are screwed completely because we’re all going to go back to our normal lives. We have a view that these are far more durable than the market expects, but this is going to be the quarter, maybe the next six months where companies have to prove themselves. And when you have this, uh, this tension, it’s going to be tough for growth stocks and we are very much prepared for it.
So you mentioned earlier this idea that one of the things that happened over the past year is a bunch of companies sort of upped their technological game. I guess you mentioned, you know, the example of Nike and some other retailers who are now much more savvy about the way they’re selling on the internet and how they’re advertising and things like that. How do you differentiate between a pure tech company versus a retailer who happens to do tech well, and is there room in your fund for both of those, or do you try to identify pure tech companies who are able to leverage off of the way the broader market or the broader business world is actually deploying technology? If that makes sense,
You know, we are, I would call myself or ourselves. We’re very focused on technology, but I wouldn’t say that we don’t have this narrow-minded arrogant view that brands and distribution don’t make sense. Like Nike is a phenomenal asset, right? And they have been able to pivot into a technologically superior focused way and companies and consumers love buying stuff on nike.com.
The same thing is true for Williams-Sonoma, for example. So, you know, this is this constant denture in, should we increase our coverage to encompass those companies? So for now, what we’re doing is, again, we are a young firm, we keep an eye, but if, for example, e-commerce becomes 30 or 40% of total Nike sales or 70% of Nike sales over time. And once we get to that, you know, high thirties, high forties levels, but you can be pretty sure that we’ll be covering those assets because when it comes to e-commerce in particular, there’s nothing called an e-commerce company anymore.
Everything will become a form of omni-channel. Right? So who would have thought that Amazon bought whole foods, then whole foods makes it an omnichannel retailer, right? And so on and so forth. Wayfair is opening up stores. Peloton is omni-channel from the get-go. Apple is omni-channel from the get go. They’ve got stores all over the world. And so this idea of a pure play internet commerce company in the, in the next decade may not necessarily be true because at the end, they’re selling to humans and humans want different experiences.
Now, the trend that is I’m super excited about is the point you alluded to, you have a company like Nike, which is I think, best of breed, very forward looking great technology team. They may not be able to compete with Amazon on tech per se. But what we have is a bunch of software companies that are building the intelligence competence that enabled the real world American international economy to compete with the tech giants. And one of those companies, for example, is data bricks, right?
DataBricks provides machine learning, competence and machine learning intelligence previously the purview only of Facebook and Google and Amazon and Uber and bringing it to the mass market. And so underneath the surface of these companies, as long as they had the will to become online first or are online becoming an important component, there are so many digital tools and software that provide these companies, these, the toolkit and the libraries and the Lego building blocks to potentially compete with their online first contemporaries.
So this gets to a question and, you know, Tracy said at the beginning, you know, there’s always, um, concerns, antitrust regulation. What is your view on setting aside the regulatory concerns per se, like how guaranteed is it that the Facebooks Amazons and alphabets of the world will still be the most dominant companies in the world didn’t say five or 10 years, or could it be that over time, some of the expertise they have does get distributed like you described and that, uh, that moat that they have, uh, however it is, uh, starts to meaningfully get eroded. So
Every company, whether it’s big or small should and dust live in a healthy state of paranoia now. So again, there are many ways to answer this question. Number one is let’s take Google. I think Google is, you know, it’s just unconquerable in many ways, it’s impossible. It’s, it’s going to be very, very hard to get a replacement for traditional search. So I think core search and core YouTube has just another 20 years to go.
And I don’t see how there’s any replacement for it. Anytime soon came and maybe YouTube has replacements, but tech talk and Facebook videos and other things, but very hard to replace it. Amazon was never going to be a monopoly anyway. So this idea of monopolies winning. So the one true monopoly, I think is Google and potentially, but with which so, which is why they are always at the crossroads of antitrust, Amazon was never a monopoly, right?
Even today, if you compare it to the total overall retail market, there’s still a small fraction and there are many people attacking that large. So I think Amazon is not vulnerable, but the reality is that everyone will start chipping away at pieces. But again, this goes back to my point at the beginning, if you think of the world or the internet world as a zero sum game with market share fights, then of course, Amazon under threat.
In fact, I would argue that take any company in the world, the market share dominant company, the market share always goes down. Amazon’s market share will go down because Wayfair is growing faster than Amazon, but Amazon itself will keep growing its fair share because the overall pie is growing, right? So the week, which is going to have different people trying to compete different slivers of Amazon, because you know, it’s a big company and that makes sense.
Facebook is very different. It is impossible to have to kind of replicate the impact that it has on small businesses around the world. Either through Instagram or through Facebook core blue app. And so again, disrupting Facebook, I think it’s going to be very, very hard. And I hear this constant refrain that says, oh, who uses Facebook anymore? Yeah, maybe you don’t, but you use Instagram, you use WhatsApp, you know, moms use and you know, my wife and, you know, we use Facebook groups, the people have stopped using Facebook for their friends and they’re now finding groups for themselves. So my wife and, you know, found a Tidepool group for my six year old son who, who loves tidepools, right? Facebook itself is morphing yourself. And guess what, what is Facebook doing that? Taking those dozens of billions of both R&D spend every year.
And they’re saying, listen, we cannot be completely dependent on Apple for distribution. We had to build our own platform because apple itself realizes that that services business is a very lucrative business and they want to get a piece of that. And so hiding behind the guise of privacy, they are trying to build an entire ad stack. And so you’re seeing Apple and Facebook going against each other. There are plenty of self and forced errors that these companies do on themselves versus just competition and looking 10 years out. I don’t think anything has so on a 10 year basis. I don’t think anything happens to either Facebook or apple or Microsoft or Google or Amazon, nothing happens. So maybe regulatory, maybe there’s stress on regulatory purview, maybe there’s antitrust tension. But the reality is that if you break up Facebook or Google, the sum of the parts is bigger than the whole. And so it’s hard to see in the next five to 10 years, anything happening to these companies.
Wait, can I just press you on that regulatory point? Because you know, I’m over here in Hong Kong and it’s kind of striking to me that the only thing that the politicians of the world, or the authorities of the world seem to agree on is that they need to be limiting big tech’s power in some ways. So in Europe, the U.S. and in China, there’s this agreement that they need to do something about tech. Why aren’t you more worried about it? Or how realistic do you think that breakup risk might actually be?
So, first of all, the worries and the tension around something bad happening to big tech in quotes is already embedded in their multiples. That is why Alibaba trades at 14 times EBITDA. And that is why Facebook trades at I think, you know, 20 times or 22 times. And that’s why these multiples are the Amazon trades at 16 times EBITDA.
That is why their multiples are so cheap. There’s a reason why Amazon stock hasn’t moved in nine months, right? It’s just, it’s a flat line, right? There’s a lot of tension, right? And that’s somewhat embedded in multiples. So I’m not intelligent enough to go and predict, you know, the binomial tree of decision-making in different governments. But so our framework is simple. The threat of regulation is here to stay. And the threat of regulation is real, depending on country. In Europe, it’s very real, right?
They’ve been fining American companies for a long time in China. It’s very, very real as you’ve seen over the last six months, right. And everyone is now in regulatory huddled down mode in the U.S. we hear news of regulation. We hear senators, you know, you know, talking to these CEOs in these, uh, in these meetings. And, you know, it’s not clear to me what’s going to come out of it. There’s, there’s some, there’s some tension for sure. And so what we do is we say, let’s take a very sober view of this. The only thing we can control in our hands is our view on where the business grows, because we are business analysts first and have a way to revenues grow by this free cash flow, grow at us, EBITDA grow over time, and then let us put suitably sober and low multiples of needed on these stocks and still see if we can make a, a real return of north of 20, 25%, but just kind of what we aspire to make and everything else for us is gravy on the cake.
It’s all gravy, like everything has upside optionality for us. And so I think we just had to take that very sober view on what happens to the world. But the real, the reality is you take China as a case study the Chinese government when you talked about it, and there’s all this news about an financial. So Alibaba being unfairly targeted, first of all, that is completely wrong. They were targeting everybody. It just so happened that at a point in time after one of the founders, uh, comments, it gave them the reason to go behind Alibaba. And as a result of that, it was a, they, they cracked on an ant financial, the IPO, which is the right thing to do, because you cannot have a consumer lending business in a country as big as an financial Gregg, 80 or 90% creates systematic risk to the Chinese financial system.
So I would argue they did the right thing early on by slowing it down completely. So actually kudos to those regulators. You can’t have a lending business growing as fast as they have a great number one. Now, number two is Alibaba historically was the propagator of certain anti-monopoly practices, but it wasn’t that they cracked an Alibaba alone. First of all, they were cracking down on Alibaba for three years, passed to pressure from PinDuoDuo, which is, which is the right thing to do.
But now PinDuoDuo, and may two want themselves out of the regulatory crosshairs, because they are being quite aggressive in growing a specific form of grocery called community group buying. So what happens to, you know, all the people in the wet markets, China, I would argue that I think the Chinese regulatory strategy is the right thing because things in China get incredibly aggressively competitive and then create a lot of, you know, second order effects that nobody wants.
I don’t think the regulatory authorities there want to destroy their local champions. So the reason why we’re actually quite confident about investing in China is we’ve been through the Spain a few times in the past. We’ve seen this post Alibaba IPO, you see this in 2015 in August 15. We, so we’ve seen these pockets of six months to one year where things get really bad. But if you look beyond that wander, and luckily for us, we have three or locked in capital. We have the we’re lucky enough to have the place to look out one to two years and then think about what those companies could look like, which is why China is such a great place to invest right now, in my opinion, now let’s move to the U S in the U S I hope that we don’t shoot our national champions in the foot, no acid, acid, American precedent.
Like I just find it I’m stressed out when I look at these CEOs being interrogated in the Senate and for right reasons — I get why they are. But I feel like we are behind the curve in our sophistication and understanding of what this company is I do. But my view is, okay, the worst case outcome is that these companies get regulated. And what is the ultimate impact of regulation? They break up these companies. The way I’m at peace about this is that’ll create a lot of tension in these companies and the multiples are low. So maybe they even go lower. And actually I argue that on a longer term basis, if Google got broken up, our Amazon got broken up, or our, our Facebook, our group broken up, it would actually create a couple of incremental trillion dollars in equity value.
Because if you think about Amazon today, there’s a trillion dollars embedded today in the cloud business. Out three years, you add international retail, that’s a few hundred billion dollars effectively today. Amazon stock at close to $3,000 a share. I’m going to argue that you get the entire us business and the ads business for free. And that’s the beauty. We did the analysis Alibaba in Alibaba’s case and here, and this is a super interesting, it’s such a cheap stock right now that in three years under our estimates, if you strip out the value off Ali cloud and give it a low, multiple strip out the value of an financials, give it a sober, multiple sober equity value, give some credit for their on demand services and some, some value for their non retail businesses. Sorry that the retail offline businesses, you buy the core business Taobao and Tmall, which by the way, were the hottest things back in the day in China, still growing GMV between 12 and 17% for as far as the eye can see.
And remember, they are still under monetized. So monetization probably grows 18 to 20% for as long as the eye can see if you did the math there, you get that business growing at high teens to low twenties for four times, EBITDA looking out three years and negative EBITDA looking at five years negative, you actually get paid to own those businesses. And again, when you, when you think about all the drivers of what these companies are doing, and same thing with Peloton, right, the company is, is such a, an incredible machine of hardware and software well verticalized, and you strip out the hardware business, you get paid to own the entire subscription business, which is the Peloton app and what you pay 40 bucks, 40 bucks a month for. So there’s just so much tremendous value hidden that is not captured in the headline EPS earnings of the headlight. EBITDAR next,
I guess, that real quickly and Ram just real briefly. I mean, what would you say was the biggest surprise for you? Like what actually, was there anything in the last year, either in the real economy or market that genuinely sort of like went against your intuition intuition or something?
Honestly, the entire year, last year,
I guess that’s a pretty good answer.
The entire year was a surprise. And so I would argue that in a, you know, we’ve been constantly humbled in this business. You get humbled all the time. And last year was a humbling year, even though we did well, it was a humbling year and lots of new learnings and, you know, hopefully it sets us up for a great next many years.
Well, good luck. And Ram thank you so much for coming on Odd Lots.
I so appreciate it, Tracy and Joe, thank you for having me around.
Thanks Ram, that was really good!
Tracy. I really liked that one. You know, if they’re all like the sort of like lumber and housing and crypto ones, it was nice to hear like, here’s … let’s talk some tech stocks
Talk about tech stocks? Yeah, it was very comforting. I do think though. I mean, I do think directionally, I agree with Ram just this idea that the world is going to go back to normal and all these people who have been buying stuff off Amazon, or, you know, watching things on Netflix and doing meetings on Zoom, are all going to stop doing that. That seems wrong to me. And you know, the fact that we are doing this podcast over zoom, um, and I’m about to order something off of Amazon, you know, you can see it in your day-to-day life.
Yeah, no, exactly. Right. And I kind of got this impression that I mean, the way I was like, whereas I think this sort of like go back to normal is like a bad frame. I mean, yes. Like we’re going outside more people are going to go back to offices, but his point was like, well, okay, like, that’s still gonna mean that business. It doesn’t mean that businesses aren’t going to use Facebook or Instagram for advertising. And I thought it was, that was an interesting point, which is that like, look, a lot of people are going to do a lot of spending. We’re going to travel more this year than we did last year. We’re going to go to restaurants more than we did last year. Well, that creates a lot of demand for advertising and the place people advertise in 2021 is online. And so this idea of like a shift offline in some ways is true, but in some ways it just means more digital business.
Yeah. I think that’s right.
Another thing that I thought about is this, like, you know, people for years have like tech stocks are expensive, right? Like in any time we could have recorded this podcast in the last decade and someone would have said, tech stocks are expensive, but clearly in like in retrospect they weren’t right. Like in retrospect, not only did the stocks go up a lot more, but also like they crushed, you know, if you look and say Amazon’s earnings today, I’m certain it’s higher than it was. And it’s higher than what people would have predicted in 2015 or 2010. And so I think like one way to interpret his thesis is just like, all these companies have been underestimated for years. And there’s no reason to think that they’re not still underestimated even after, uh, they’ve done so well.
Well, this is the one thing that I was thinking about, which is how much of that success is fundamentals versus how much of it is flow? And the idea of, you know, if you’re Amazon, you’re consistently a winner and you just sort of attract more and more money and eventually it becomes a sort of self-fulfilling cycle. And that’s one reason why the stock price never comes down and the valuation gets really expensive because there’s nothing to sort of break the cycle of new money flowing into it. But then on the other hand, you know, as long as Amazon doesn’t go bust, which it seems very unlikely to do, maybe that doesn’t matter so much, right? It just becomes a sort of like ball of money that rolls along, collecting more money and getting even bigger.
And again, to be fair, like they do, these companies do seem to crush earnings estimates year after year after year. There’s also that that also helps,
Helps a little bit., doesn’t it? Yeah. All right. Should we leave it there?
Let’s leave it there.
You can follow Ram Parameswaran on Twitter at @_ram_.