Good Investing Talks - Tech bubble? Tech crash? Baki Irmak on tech investing in turbulent times

Episode Date: August 2, 2022

Baki Irmak runs the Digital Leaders Fund. At the start of this mini-series, we discuss how he manages his tech portfolio in turbulent times.

In 2022, many things have changed for investors. In a small mini-series, I want to explore with different tech-focused investors how they're maneuvering this challenging environment. Today I'm having Baki Emack of the Digital Leaders Fund with me. But before we start the video, I want to present you a small message from our sponsor. This episode of Good Investing Talks is supported by Interactive Brokers. If you're ever looking for a broker, Interactive Brokers is the place to go. I personally use their service because I think they have a great selection of stocks and markets you can access. They have super fair prices and a great tracking system to track your performance.

If you want to try out the offer of Interactive Brokers and support my channel, please click on the link below. There you will be directed to Interactive Brokers and can get an idea what they offer for you. I really like their tool and it's a high recommendation by me and now enjoy the video hello baki it's great to have you here for our interview um i already had you on that channel in german but we haven't talked in english so it's maybe helpful to introduce it for the beginning okay um and let's go a bit back baki what did you do before starting the digital years fund well uh i started my career actually in the the 90s. It was exactly the time of the dot-com crash. I started. Actually, a couple of years earlier.

So I saw all the benefits and all the, an interesting time around, you know, the start of the internet and the IPOs of the TMT stocks and so on. And yeah, I then moved on to another company to Commerzbank was managing mutual funds there. And later, I joined Deutsche Bank, did a couple of different jobs there. But in 2014, I was running the digital business of Deutsche Assets and Wealth Management, the two days, DWS. US. And in 2017, I left Deutsche and founded actually our investment boutique, PIFO Capital. And the idea was actually, given all the experiences I made in the digital business,

the idea was actually to start to start a fund focusing on company thriving in the digital age. Yeah, and what we analyzed back then was that there are a lot of tools besides, you know, the fundamental evaluation approach. There are a lot of tools like looking at the digital exhaust, the digital footprint, and, you know, investigating the digital KPIs in order to evaluate whether a company is successful in the age or not. So we launched our first fund, the Digital Leaders Fund, back in 2018. And in 2021 we launched another fund with the same approach focusing on companies thriving in the digital age, but in emerging markets. And since February 2020, we also have a China fund called China Digital Leaders. This is a very interesting journey. Let me raise a follow-up question here.

You said you live through the dot-com crash. So this crisis, what does you remind of the dot-com crash and what is different now? Well, I mean, of course, valuation. you know, here's a topic you have in your mind when you think about the fancy valuations we had in 2020, 2021. And when you compare that with the valuation, with the inflated valuations you had actually in 2000 or 1999, 1999. And it was interesting. I mean, when you look at back then, You had a couple of companies, you know, probably out of, I don't know, the 500 companies in Sen and Boers, you probably had some, you know, companies like 50 or 100, you know, with valuations,

which were something around, you know, enterprise value sales around 10. And, you know, back then when we had this discussion, I remember, I mean, that was very inflated. People, you know, were really surprised, you know, how inflation. an evaluation of enterprise value of multiple enterprise value of 10 and above is actually possible. And so I still remember some of the discussions we had back then. But when you looked at 2020, you know, we had, I mean, we had, I don't know, I mean, hundreds of companies actually having a valuation far above this multiple of enterprise value

revenue sales above 10 or 20 or even in the, you know, some e-commerce companies at valuations far above EV sales of 50 and the cybersecurity companies. And still, interestingly, still after even such a severe sell-off, you still have companies around with a very, very high valuation. So that's the one parallel I have in mind. The other is actually, I mean, it's, it's not a sudden sell-off, a sudden crash we have currently. It's a kind of a salami crash, how many people call it. So it's a more painful experience for fund managers, for everyone who is investing. So it doesn't happen, you know,

within the day. So, you know, the rotation from value to growth happened probably, you know, somewhere, summer, autumn, 2021. And still, the valuation, the volatility levels, the, the, the implied volatility levels. I mean, the VIX is around 20, 31. It's not at the levels of somewhere around 50 or somewhere around 80, what we had actually in the pandemic crash. But there are also a lot of differences, actually. I mean, and one of the differences is back then there was no smartphone.

First of all, you know, so there was no iPhone. There was no smartphone. Access to information was probably different. and so that's that's that's that's one thing the other thing is I think you can't compare the NASDAQ back then to the NASDAQ today you know the the premiums you had actually after a crash or during the high levels of you know 99, 2000 the premium of let's say Stennan poor's IT against the you know average than POS the premium was above 100 you know looking at PE levels.

Today, I mean, the level, the premium level is actually much, much lower. It's something like 20, 25%. That's actually the average premium St.N.P.P.I.T. Companies had actually in the last 20, I mean, 25 years against the average valuation of St.N. Puss. So valuation levels came down, I think, dramatically. I mean, already. and the other experiences when you look at, you know, the dot-com crash. So the legacy companies, you know, they were actually the established companies

and they didn't have to catch up, they did their business, and they didn't fight for survival. It was actually more the new companies, the startup. and, you know, the, you know, the newer companies, we're actually trying to survive and trying to catch up, trying to make some money. Today, I would say it's a little bit different, actually. I mean, we have a completely different environment, and I would say the legacy company is still,

even when you look at the market, it's probably different, but this legacy companies are probably trying to catch up when it comes to your adoption to the digital age. And I think there is no question behind a, lot of the companies we are looking today experiencing a huge sell of that they actually will survive i think there is no question behind you know companies even in the cyber security uh area um fields that there that there is no question whether they survive or not it's you know it's just the question what's the right valuation actually let me raise another

follow-up questions you already mentioned digital tools so what are you two to three favorite digital tools in the stock analysis. We already did a video in German, which I link up here for the ones who are interested in this as well. But what are your favorite two to three digital tools? So, you know, the approach of our team is actually how to measure actually digital intangibles or intangibles. I mean, as you know the valuation of most of most of the companies actually in the Senate and Purs is actually determined more through intangibles than tangible assets and the question is how to measure the value of the intangibles and I think one approach is you know to look at the

digital footprint so to give you just a example we look for example of we look at app data so app analytics so we look at downloads we look at monthly active user engagement numbers and if you look at monthly active user and daily active user and you take you know you divide daily active user through monthly active user you get actually good sense for stickiness so how sticky are the clients how loyal are the clients to the to the business. How engaged are the clients. And so app analytics is, I think, it's a very good approach to understand the company's traction. Also, it helps you a little bit

to now cast actually the company's success and not to wait for the quarterly numbers. another approach is actually looking at traffic numbers looking at traffic numbers so you look at you know how traffic evolves over time and of course you have to differentiate between paid traffic and organic traffic on the one side and then you can deep dive into this numbers you can have probably more granular data if you look at you know not only top level

domain but also a churn data for example if you look at netflix or if you look at um um peloton for example i mean the traffic data or the the app usage data actually gave you a very good sense that something is wrong with uh with growth of this of this company so these are you know two examples you we look also you know at numbers like um ad spend and try to understand understand, you know, how people spend digital advertisement money. What are the platforms they favor? But we also look at numbers like in LinkedIn, employee numbers over time. We look at glass door ratings and numbers over time.

So these are a couple of ideas, you know, how the digital footprint gives you actually a good sense to analyze companies. So let me bring this back to your funds. So what is the digital leader strategy you're falling with your funds? Well, as I said, I mean, we're investing in companies. We believe they thrive in the digital age. And we think that they, you know, are part or even dominate a secular trend within the digital age. But we are not just focused on tech companies.

we think that there are three kind of winners in the digital age. So on the one side, the legacy companies, legacy companies who are able to adapt to the digital age and they use technology in order to become better companies to improve their business model. And usually they are leaders in digital adaption in their peer. group so the companies like BBVA within the bank sector and then the second category we call digital business leaders so typically these are platform companies people are familiar with so meta or alphabet and so usually they do 100% of their revenues through digital channels

And the third pillar is we call these companies digital enablers. So companies who enable digitalization with software, hardware or services. And typically these kind of companies are actually, we call them also the architects of the digital world. And typically these are high growth companies. and often these are companies they pick a small niche within a sector

and they dominate it and they are they use digitalization technologies like agile deployment they measure the feedback of the client's

immediate response and make the product just better We're doing that. And so when you look at the legacy companies, they probably, I mean, today I would say, some of them are even, you know, probably more or less value companies. The digital business leaders are growth companies, but fairly attractive valued. And then with the digital enablers, you have actually more. less high growth companies.

So together, it's actually unique risk return profile. So together you get a kind of a convex portfolio and try to navigate with this kind of risk profile actually difficult markets. So this raises some portfolio constructions questions for me. So this three pillars, how have they reacted with each other in like the Last period where a lot of the digital businesses profited from low interest rates and went up a lot. So how have these three pillars acted together in concert? Yeah, obviously.

I mean, we had tremendous performance actually in 2018 even. I mean, when the market was actually negative, the portfolio was the performance. of something like 2.5% in 2018, 2019 was an amazing year 2020. We had the pandemic. And interestingly, so typically when something like a crash happens, people invest in value stocks, the pandemic was a different experience, February, March, 2020.

People actually sold value stocks because, I mean, all companies somehow dependent on supply chain, or doing something physically, doing something tangible, you know, had the issues. And all the software companies did actually create. And then, you know, we had, you know, this huge boost of digital economies. And so the digital enablers did amazing. And back then, even in the summer, I mean, we had also our conversations. You know, we discussed.

you know, the valuation levels, even back then. So even back then, it didn't feel right, you know, because, I mean, five years, ten years' growth was actually already priced in the stocks. And so in 2000, so we started actually in 2020 already to switch a little bit from, you know, digital enablers towards, you know, digital business leaders. and some of the legacy companies. So 2021, we did actually fine, even after the market started to rotate, actually,

from growth to value. So the performance was around 20%. At the end of the year, it was, I think, 80% in 2021. And then, you know, it looked, actually for us, you know. So it looked like in February 2022, the world was like, well, GDP growth will be okay. The market will come out of the pandemic, just fine.

The interventions of the governments and the central banks helped a lot, of course, to rescue the economy and the business model a lot of companies and it looked like you know like so we are probably coming back to a trajectory where some of the growth companies could flourish again even the valuation and when you look back you know we had inflation inflation expectation had a high I mean two years five years three years inflation expectation was up actually in In autumn, 2021, but in February, it was completely down.

The inflation expectation was actually really low. So everyone's sense was, or most of the people, sense was this is really something transitory. And then, you know, Russia happened. I mean, with attack of Ukraine through Russia, the world changed, in my view, completely again. And I mean, when you look at before 2020 and after 2022, I think so a lot of things look now very different, like interest rates are debt, interest rates are back, you know, and it's not about blitzscaling and, you know, land grabbing. It's all about investors want to know, hey, show me the money. It's not about, you know, the target, addressable market, it's more about, you know, return on investment and weighted average of cost of capital.

So, and in this environment, you know, the portfolio got a big hit. So, yeah, you know, somewhere around minus 32%. So, you know, if you compare us with, you know, funds like, ARC or, you know, some of the other funds focusing on actually digitalization on digital models and new models. So we are far better, but you know, it's actually, you know, not a, not a performance. I'm, you know, I'm happy of, of course, but nevertheless, you know, the risk return profile of these three pillars helped actually to limit some of the losses compared to some

funds in the peer group. So the interesting question investing is always like what are the future returns and in your eyes what has changed here with this kind of new macro setup with inflation and what do you see here as opportunities? Yeah, I mean I'm not trying to to guess where you know whether we get a recession or not or how severe the recession is or not. I look at the numbers and when I look at five. years inflation expectations, you know, which are priced in the inflation protected bonds. Now, so market doesn't expect, actually, you know, that inflation will stay up. I mean, obviously, inflation is really high. And probably next month and quarters, it will stay high. But if you look at market expectation about inflation, it's around 2.4, 2.5%, you know, five years inflation expectations.

So that tells you, you know, that the market has a very clear view. Inflation will be not a long-term topic, you know. So the question is, you know, so whether you want to compare this time with, you know, with 73 until 83 or you want to compare this time probably more with a dot-com bubble. Yeah. On the other side, you know, when you. So, when we look at valuation of different kind of stocks, and especially, for example, we are also invested in finance, you know, some of the banks, digitally, probably mature banks

and some of the fintechs, that tells you also a different story. If you look at, for example, European banks, I mean, they got a severe hit. I mean, at the beginning of the year, as I said, the world was absolutely fine. So the European banks, after a couple of years, actually, probably decades. They had a good year in 2021. 2022 started actually excellent. When you look at the numbers of the banks, they look good. You know, the non-performing loans are very low, below actually the 20 years averages.

When you look at the stock prices, you know, they imply something completely different. They imply actually not a recession. They imply more a depression, actually, or a severe recession. So I looked at a presentation of Critterswis the other day. and so they said actually the valuation of the European banks they imply currently a drop down of house prices of 40% in the next three years they imply an unemployment rate in Europe of around 12% in the coming three years and they imply a contraction of the GDP of around 10 to 12%.

So looking at, you know, the valuation of banks, so the picture is pretty different. So the question is for, you know, as a fund miniature, you know, you have to look at your numbers and then, or at these numbers and have to analyze what the market actually tells you and then you have to make your own positions and your own bets. So I'm not actually in this extreme pessimistic camp currently. So I think there are a lot of questions we, you know, we can't answer currently.

I mean, which are, you know, macroeconomic topics like, you know, zero COVID in China. Of course, the war of Russia against the free world and against Ukraine. and all, you know, the effects and consequences that brings with it. So, you know, it's really, you know, difficult to answer the question. So what we do actually in this kind of environment, we try to stick to a stock picking approach and valuation, actually. So, so example is, let's say, let's say you compare the, you know, this current environment actually with, you know, something, you know, the dot-com bubble. So, and the experience back then was, well, we had, you know, a seller from 2000 to 2003 in the NASDAQ of 70%, 77%. and and and but the but the sell-off you know individually for the stocks was not from 2000 to 2003

so for amazon had you know the law in october 2001 and actually from october 2001 till october 2003 actually something like 800%. So from the law within the crash, you know, in the middle of the crash, actually one and a half year later, you had actually a performance of 800%. Yeah?

There is no time period where you had this performance. And even, I mean, most of the people, when they look at Amazon, they look at probably, or they would suggest that Amazon did this huge performance from 2011, 12, you know till today so when aWS you know convinced the markets and amazon came with prime and you know margin went up and so on but actually from 2011 2012 till today amazon performed i mean pretty good but you know something like 750 percent what i want to say is you know you can't

you know so sometimes it you know for amazon it was definitely for investors in amazon was definitely the best time to buy Amazon was actually in the middle of the crash. So the other thing is, you know, when you look, so the valuation of Amazon back then, in the law, in 2001, when they really hit the law, was something like five times gross profit, five times gross profit. And when you look at, you know, some of the companies, I mean, I saw you interview, Tarek, Mueller from About You and then there is another

e-commerce play in Germany. Zalando. I mean, Zalando, for example, is a solid European e-commerce platform. They're profitable. I don't think that Amazon will go bust.

Sorry, Zalando. But Zalando is currently valued with 1.5 for us profit. So compared to the five times gross profit, actually Amazon, it's low. So this gives me a little bit more comfort, you know, than looking at macro data. So and when we look at, you know, our portfolio, so there are a lot of companies, you know, where I'm perfectly happy with the valuations level currently.

And I think that's, you know, the, you know, the best approach you actually can have in these kind of markets, you know, look at valuation, look up the business models, stick to your portfolio. I mean, what we do, of course, we have a growth bias. So there are some of the companies which are, you know, very attractively valued. where you have already discounted, probably to devalue today. But then there are companies, you know, where we believe that they do something different,

they will, you know, be probably the next big, you know, companies in their field. And there we accept, you know, higher prices, higher valuation. And I think it's very important that you have a good job education of this, you know, kind of companies in your portfolio. So let us jump here a bit more on a meta level. and talk a bit about on the one side, digitalization and inflation on the other side.

So what do you think about both terms and how they play together? And is there also maybe a deflationary nature of digitalization? Like for instance, in one podcast I heard to prepare for this interview. You mentioned that there's new bank. They are able to acquire customers for like $2. It's a Brazilian bank. And if you think about like a typical branch bank, it's super hard to imagine that they will acquire customers for the same amount of money in their branches. So what do you think about like these two ideas in play?

Yeah, I mean, there is one big paradox on actually in the market where, you know, where you would actually assume that all this digitalization actually would lead to a huge. huge productivity gain, and so that the companies are much better of, and that that would lead actually to a decrease of inflation. So productivity gains, I mean, typically we had actually huge productivity gains actually in the 90s. But when you look at the economy overall, you don't see that much. And I think the one reason is that legacy companies struggle a lot with implementation of, you know, of digital tools or technology. And typically you, you know, typically when you, I mean, when you worked in a legacy company, you know, you buy a software tool, you pay probably 10% for the software and 90% for the implementation.

And then, you know, the whole digital transformation journey, you know, to, you know, to convince all the employees, culturally it's a big, you know, it's a tough exercise. Digitalize a company in the core is really tough. And so you lose a lot of your productivity while doing that. So that's the one thing. And when you look at data individually, then you realize quickly that, you know, from company to company, Productivity levels are very, very different. So, I mean, Apple, Microsoft, Alphabet, and Meta's productivity levels are probably much, much better,

and they had huge productivity gains, actually. And with companies who are, you know, companies who are much more advanced in the digital journey, like companies like BBVA, for example, they started, you know, the digital journey much earlier than probably other banks. They did it probably with much more management commitment than other banks. the CEO, you know, is part of, you know, the agile product development and teams. And he's not, you know, he's not someone who is letting others do the work. And so when you look at BBVA, the cost income ratio is around, I mean, the last border, the cost income ratio was 40.7. 40.7.

So this is absolutely unique within European peers. when you look at, you know, they, I mean, in first quarter, they were able to acquire something like, I mean, 2.3, 4 million clients through digital channels, not through branches. And, yeah, and of course, fintechs like NewBank. I mean, NewBank is actually a great example of, you know, how successful a bank, you know, Neobank could be. I mean, yeah, as you mentioned. I mean, they had something like 5.5 million clients in Q1, new clients. I mean, that's extraordinary, you know, in Brazil and Colombia and in Mexico. And yeah, the client acquisition costs is, you know, something around $5. I mean, that's huge. That's very, very

efficient. Here, I want to come back to the digital transformational leaders. As you already explained, there's a certain trickiness in a digital transformation. So how do you make sure that you invest in a digital transformation leader that is not a turnaround that doesn't turn and like where you have efficient digital transformation? Yeah, sure. I mean, so ideally you can measure it. You know, ideally the digital footprint tells you.

a very clear story. So in retail banking, it's quite easy. You look at the apps. You look at the traffic numbers. You look at, you know, the number of products they sell through digital channels. And then you look at how the numbers improve cost income ratios, whether they go down, how a client acquisition actually works. And that tells you actually then a pretty straightforward story.

So you know, it's much tougher to measure with this kind of approach, you know, your success in investment banking or an M&A and in other area. So that's one approach. But on the other side, you know, so when we analyze banks, of course, we look at all the fundamental numbers, of course, too. I mean, obviously, you know, net interest, margin development. I mean, typically banks should actually profit now from the, from, you know, the current environment.

And they do on that side, but the skepticism around loan loss provision and probably some of the accounting standards are probably missing. leading currently, a couple of investors. Like, you know, I mean, with IFRS 9, you know, you have to account credit losses or you have to provision actually, expected losses. And that, you know, leads, you know, to a strange, you know, picture currently. like, you know, if you have companies were really doing good in their loan business, they are growing dramatically.

So typically they don't, you know, they don't have the revenues of these loans in their balance sheet currently or in the numbers, in the quarterly numbers, but they have the provisions actually, so the expected loss provisions, yeah. So like with New Bank, you have the picture. You know, Abida is 10 million, but, you know, expected credit losses are something like 880 million. So it depends on how the trajectory of the macro environment is and how the loan losses will be really effectively that will change dramatically, you know, the profitability profile of a company. It's less an issue with established banks, but for example, for, you know,

banks like New Bank or banks like Lending Club, you know, it's a big topic. So in a digital leader's family, you have three funds, one where you're in the focus with, I think, mostly in North America and Europe, and then there's the China Fund and the Emerging Markets Fund. So what do you see from the other regions? How is inflation influencing valuations and companies there? What is different in the regions in the emerging markets and in China? Yeah, I mean, if you look at emerging markets, I mean, in the old days, emerging markets, you know, where, you know, you're invested actually in banks and commodities. So they, these two sectors dominated actually emerging markets.

And it's still, you know, more or less the case. You know, there are also some other established companies and probably some, you know, newer companies. But commodities and banks dominate emerging markets. emerging markets. So obviously in commodity rich emerging markets should actually, you know, profit from this development. And on the other side, at the beginning of this kind of inflationary environment, you know, they get usually a big hit. So and some of them reacted quite, I mean, nimble or harsh, actually, the way how they approached actually the whole inflationary environment. Like, for example, if you look at Brazil, I mean, the interest rates,

you know, the CELIC actually, so the leading interest rates from central banks went up from something like 2 to 13.25%. So, you know, forget what you see in the US or in developed markets. I mean, the U.S. already started this process. I mean, Europe is still rhetorically, you know, preparing for this, the first approach. Nevertheless, I mean, the interest rates reacted already. But so you had huge headwinds, macro headwinds actually in a lot of these emerging markets companies. So they, and this is not just Brazil.

Brazil is probably an extreme example, but most of the emerging market companies increased interest rates and whether it's Colombia or it's Mexico or you know it's Thailand or Indonesia or all this and so that you know in some cases it helped their currency but

but it didn't help actually GDP growth nevertheless you know so typically you know in this kind of in my end emerging market should be actually should actually benefit but then you had you know it's you know external you had you know

in China and in Russia you know you had something you have you didn't you haven't experience actually before I mean two countries where actually who could have been the big winners actually of environment like this I mean look back at the dot-com bubble from 2000 to 2003, when the market collapsed actually in Europe and the US, China did something like 125% performance positive, yeah, increase in 2000, 2020, 2003. And Russia was actually also a very good market. I think something like 100% back then. And Russia could have been, you know, the big winner actually, currently also. But, you know, in both cases, their presidents, you know, damaged the destiny of their country dramatically.

And that helped some of the emerging market countries and, you know, and some of them suffered. So when you look at, you know, what happened in China with the regulation, with zero COVID, and with trying to, you know, come up with actually with a narrative like the NATO is the reason why we have all these issues. I mean, that actually too interesting development, actually, in the neighbor countries of China. I mean, Thailand, Vietnam, Indonesia and Malaysia benefited a lot.

So a lot of money was actually allocated from China to India to Vietnam to Thailand. So they did actually quite good, especially in 2021. But overall, I would say we are quite, you know, constructive for commodity rich emerging markets. And we think they have a lot of amazing companies, digitally very advanced. Some of them, you know, leading in the continent. and prices are you know came down a lot and so these stocks suffered but valuations levels are low and we think some of these companies offer good investment opportunities so then let's break our interview to the company level which companies do you especially like at the moment

yeah I mean as I mentioned so we spoke about BVBA you know it's a It's actually a Spanish bank, but being a, you know, having a hat quote in Spain, but most of the business is actually from emerging markets in Mexico, in Latin America, and in Turkey is a very important market for them. So that's a company, you know, we like in the digital, you know, in the legacy company area. We spoke about New Bank. I think it's, you know, I don't, I don't think that there is any.

any neobank outside China, probably in India, growing with this pace, and that's successfully actually profitably. And the valuations level were very high when they did their IPO. Market capitalization was something like 40 billion, came down now dramatically. Enterprise values around now 15, 15 billion. So much more investable currently. I mean, is New Bank, why shouldn't be New Bank actually priced higher than the established bank in Brazil? I think, you know, they're doing good.

They are not actually that dependent on capital markets. They did an IPO. They raised a lot of money. They have $3 billion cash. So they could even, you know, benefit from, you know, some opportunities for mergers and acquisitions. actually in their segment. So that's a company we like. Another company, you know, in the emerging markets we like is Caspi.

It's actually, I mean, a leading fintech company in Kazakhstan, but the unique thing of Caspi is actually, Caspi is probably something like a master card, PayPal, and Amazon in one, you know, of Kazakhstan. They have a huge market share. And there's that successful in acquiring on the, one side and with merchants on the one side and then with clients on the other side so they don't need actually the infrastructure of you know the rail of visa or master cards you know so i think

that's that's quite unique so the p is around seven uh the market of this company it's very profitable um um the numbers were great um but of course i mean being so close to Russia, there are not a lot of investors currently investing in Kazakhstan. I mean, the approach of President Tugaya is actually quite, you know, balanced, constructive. I mean, he made very, very clear that he will not accept new states in Ukraine, proclaimed by Putin and by, you know, by this people there. So he tried to balance, you know, out, you know, all the interests between, you know, Russia on the one side, China and the Western world on the other side. I think, you know, doing quite a job.

But, obviously, you have a lot of country risk and macro risk in Kazakhstan. Another company, you know, we have in the portfolio as one of the top top 10 in the portfolio is Spotify. I mean, you're familiar with this stock. So we believe is, you know, it's actually a quite interesting platform. It's Europe's most successful platform and has 422 million clients, 180 million paying clients. Unfortunately, I mean, everyone knows they have a margin issue. So most of the money they have to pay actually for the labels. And the labels are dominating the music industry.

But nevertheless, they were able actually to increase the gross margin, you know, from something like 25% in 2018 to some to now something like 20, 28%. Comparing that with a, you know, gross margin of Netflix or 45. So you see there is a huge gap. But they realized, you know, they will never. be able to negotiate better rates actually with the

labels and most of the music and especially the vintage music which is actually mostly street on Spotify is gone they can't you know they can't you know buy or exclusive rights or whatever

but what they did you know they did the same actually with podcasts I mean they realized producing music and producing podcasts is probably a very similar business and the creators in the podcast industry they don't have any

exclusivity contracts with the labels. So they started actually the same business actually the labels did with musicians. They started actually with now Spotify is the biggest labels in the world with all the podcasts they have. Exactly. I think what you know, so currently the contribution to the gross margin

is negative because it's at the beginning. But it's very clear. I mean, when you look at the revenue numbers, just 200 million from podcasts, almost 400 million in the last border from advertisements. And they just scratched the surface. I mean, they started in the U.S. They haven't started their advertisement business, actually, in Germany and Japan and UK and, you know, and their big other markets. They just started it. So I'm quite positive there.

And I think also they're, you know, they're starting now to offer audiobooks, also interesting business. I mean, they were able to prove that mass adaption from, you know, of their clients, you know, works for a different offering. I mean, within three years, they're now market leaders actually in podcast. An audiobook, I think, is, I mean, the next logical steps, in my view. So when you look at valuation is, you know, 1.5 of revenue multiple compared to, you know, three of Netflix. But ARPOO in Netflix is much, much higher. Gross profit is much higher.

but Spotify is cash flow positive since 2016 not depend that much on on market they can you know they can finance organically their their growth and I personally think they are they are undervalued yeah and probably that's my European bias I invest but that's a company I pretty much like actually to have my portfolio let me invert my question a bit are there any companies you liked like in 2019, 2020, you currently don't like anymore? Yeah, sure. I mean, we had a couple of companies.

I mean, you are, you know, aware of some of them. I mean, we had the trade task. Amazing company. It's still amazing company. Just, you know, valuation is just too high. We were investors in HubSpot, you know, similar comments like, you're regarding the trade task. It's great company.

It's growing still. But valuation is still too high. I think enterprise value sales above 10. It doesn't work in this environment. DocuSine is another company we had. You know, we sold. But all these three companies I'm willing to buy when, you know, the valuation is fine again.

And then there are other companies, you know, like Peloton. Like we had, you know, we invested actually very early in Peloton, you know, around 18, 19. went up, I think, until 140. You know, on the way up, we sold a couple of stocks. On the way down, you know, we sold also. And then at 40, you know, 40-something, I made a clear cut. The main reason was actually, I mean, first of all,

the management was not honest. You know, you remember the conference call where the J.B. Mung analyst asked the CFO, whether their cash burn is probably not too high and they need probably money. They said, no, it's absolutely fine. We don't need more money. There is no corporate event, you know, coming up soon. Two weeks later, you know, they did a, they sold shares, you know, did a capital increase.

They needed, you know, cash immediately. The cash burn was far too high. Of course, I mean, the management changed. Still, the need for cash flow is huge. They, you know, did a couple of things wrong. I mean, you know, there's a lot of sun costs. And looking at the digitally exhaust digital footprint, we don't see that the situation is getting better.

It's actually getting worse. And that's not the same with the docuSign or with trade task or with HubSpot. It's just the valuation topic there. So I think that gives you a pretty good idea how we, approach actually these companies. So how are you thinking about debt in the companies you're investing in? I personally try to stay away from depth and just have like a tiny amount of debt or no debt at all. You could also make the argument with inflation.

Like if you have a high debt load, it gets easier and easier to repay it. So what do you think about debt? Yeah, I mean, you know, so there is a main difference between government. on the one side, dealing with debt and with companies dealing with debt, especially with, you know, real interest rates. You know, so when you look at real interest rates are negative today, still negative. I mean, we have inflation levels of 7, 8%, but the interest rates are, you know, much lower. So that's great for, you know, governments, of course.

It's great for governments, financial repression, you know, by doing nothing, actually. they get rid of the debt. That doesn't work for companies. So companies, you know, so financial repression doesn't work for companies. So debt, you know, in such an environment, will hurt you. And especially if you are a growth company

and you can't finance the growth with your operating cash flow. So when you are not able actually to finance your growth and you are dependent on capital markets, that's not something we like in the current environment. And typically in this environment, people talk typically that dividend yields are a great indicator for good performance in this environment. But at the end of the day, I mean, dividends are kind of a derivative of cash flow.

So we look at actually high free cash flow margin. You know, so that's something actually we, you know, it's very important in this, in this environment. So low valuation with a high cash flow margin, I think that's something people look at and try to avoid actually, you know, highly depth companies in this environment. So have you compared to 2020, 2021, have you generally changed something in your checklist? Like compared to the time where we had the split scaling setup? Yeah, I mean, as you know, one of the KPIs we like, you know, is the efficiency ratio. So you look at the, you know, top line growth and the free cash flow margin. And so in this kind of environment, the focus is more on actually the free cash flow margin than the top line growth, actually.

So 2020 is actually probably the year where people discovered the simple valuation metrics like, you know, P.E ratios, price to book, and this kind of stuff. And so that is actually something changed, obviously. So looking at the efficiency ratio, the focus is more on pre-cash flow margin than top line growth. And profitability is, you know, is not what people care about. And that's important. But for us, you know, it's, it's, I think very important to distinguish between

hits to the to the, sorry, the business model. Yeah, exactly. So it hits to the business model, which I explained actually by, you know, temporary external effects or

and between sequential or secular changes, actually. Yeah? And so I think this is, this is absolutely key. So I don't think that, you know, e-commerce is dead. But of course, I mean, we had, we just had an event which is, you know, unique in a

probably in a century, even like the pandemic we experienced. And that led actually to a huge change, behavioral change, actually, the way how we consume and the way how we probably intact and so on. And so I personally think that, you know, after this huge sell-off in e-commerce, for example, there are great opportunities there. So there are a couple of trends where we still think these are secular trends and they will determine stock valuations.

going forward short term you know everything is more dictated actually by sentiment but long term you know you have to look at the business model

and you have to look at the valuation levels so for the end of our interview I want to give you the chance to add something is there anything you want to add people should know about the digital leaders fund or like the current setup that's noticeable no i think um that was a you know quite uh comprehensive discussion actually on on markets probably there are a couple of topics we

really you know a lot of topics we actually didn't uh didn't discuss but you know whenever someone has a questions you know so um we have a pretty transparent website and So most of the companies we invest in, we write actually articles on them and update articles also, why we invest and sometimes why we don't invest, like why I can't as a good example. And so people, please, to everyone, feel free to reach out whenever you have a question. This is a really good closing statement. So thank you very much for coming for this interview. and thank you very much to the audience to listening to now and now it's time to say bye bye bye

as in every video also here is the disclaimer you can find a link to the disclaimer below in the show notes the disclaimer says always do your own work what we're doing here is no recommendation and no advice so please always do your own work thank you very much