Odd Lots - Why Ram Parameswaran Says the World's Biggest Tech Stocks Are Ridiculously Cheap Right Now

Episode Date: June 17, 2021

Everyone knows that tech stocks performed amazingly well amid the coronavirus crisis. In the last few months, there's been a little bit of a cooling off. But for the most part, betting on tech has been a fantastic bet for a really long time. This week's guest says there's a lot more to come. On this episode we speak with Ram Parameswaran, the Founder and CIO at Octahedron Capital — which does VC investments and invests in public equity — on what he learned over the last year, and the big things he's betting on now.See omnystudio.com/listener for privacy information.

Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. So Tracy, you know, we talk a lot about some of the big trends of the last year, talk about housing, 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 performance of big tech. defined broadly. I mean, it's 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 sort of outperformance of the thing 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, 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, maybe they weren't as hot as they were a year ago at this time, but the companies are still doing very well. So, you know, I think even with the, quote, normalization, unquote, 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 like two things going on.

I mean, one is COVID, you know, obviously forced certain economic behaviors to go more online. And so you think, okay, Zoom video, a company like that, 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 prices seem to have just gotten like magnified and five years got condensed into 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're going to be speaking with an investor in tech, who's a very sort of big picture focused, big ideas, concentrated bets in the space, someone who really sort of like

thinks deeply about where it's all going, had some major winners. I'm excited to welcome to Odlots, Ram Paramishwara, and he is the founder and CIO of Octahedron Capital. Ram, thank you so much for joining us. Well, Joe and Tracy, thank you for having me. It's a real pleasure. Yeah, this is super exciting, very excited to talk to you. What do you describe Octahedron? Because I don't think it's not like the typical fund. I know you have like very big handful of concentrated bets, but what do you describe exactly what is the structure of the fund and your general approach to investing? Thank you, Joe, for having me. So let me start with a 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 scale businesses. So what does that mean? So I've been obsessed with this idea of inner 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 fears because of very distinctive work on Amazon, where we kind of discovered through math and a bunch of other analysis that hiding inside a 5 to 6% retail margin business was 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 to having narrow definitions. That's number one. Number two is, I've started realizing and learning over the last decade that these companies not only get bigger and better over scale, but then they become these humongous, they put up these humongous revenue scale numbers that an early investor cannot comprehend.

And number three, there are niches, there are richest in niches that I did not expect. if you think about the internet being 30 years old, if you think about what actually flows through the internet, even think about net income on internet companies as a percentage of total global net income, or even you think about what's a total market cap excluding Apple across total global market cap, by almost all ways, you know, we size it to be less than 10%.

And let that sink in for a second. The internet is ubiquitous, but in almost every way you think about the internet, 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 computing, ubiquitous connectivity, now ubiquitous democratization of knowledge, and now post-COVID, 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. 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 company is possible. My impression, 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? Right. It's indeed competitive. And it's, uh, it's, just gotten more competitive historically. But this is the way we distinguish ourselves. So, number one, Joe mentioned a very important point at the beginning, which is concentration. So as a fund, you know, we believe in essentialism.

We try to constantly rank order the best ideas on a 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, right? Number two, we are not VCs. We don't take boat seats. We actually co-opt with some of the best VCs in the world who are all, many of them whom are investors in octahedron. And the value that both companies see from a firm like us, which is 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 is we can, 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 for other VCs and other board members. But then how do you also stay public or stay successful in the, the public market. And the average other fund that's competing for capital in the late stage, they are typically trying to build an index of everything going public. So it'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 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 versus somebody else. It's us and everybody else. Rom, 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, you know, 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 have you learned? Yeah, what have you learned? Yeah. You know, I think this is probably the most tumultuous event we've all faced in our lifetimes. And I don't think anybody, you know, I launched this fund in April 2020. And it was so confusing and dark that we were flying blind. Now, I'll be honest, 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 apps and downloads and scale, it all went haywire, right? The numbers were all over the place. We weren't quite sure. And that's why you put the deck. We read 100 transcripts.

And so let's put it all together in a format. And the format, we just gave it to the world because we figure that if 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. It happened completely by mistake. Got it. So what did we learn?

Number one is fully convinced that the world is 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 very difficult comms 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 bite 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 year. How are you going to acquire and re-engage all these billions of consumers who are now going to be out traveling and partying and eating out and just going about their normal lives and probably having revenge spending over the next, you know, 12 months? Well, an obvious winner is digital advertising and the scale and engagement and tools and the importance to the economy should not be underestimated. That's number one.

Number two, the world of SMBs. You know, for 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 bank in the middle of our wheelhouse. 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 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. The pace of new business formations has been unprecedented. And therefore, the use of software, whether it's payment systems like Brex or whether it's supply chain solutions, solutions like fare or 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 with the same tools and services and products that the largest retailers in the

world have and even better because digital advertising gets you out to billions of consumers, they have a shot at advertising and getting the consumers with the same level playing field the largest companies in the world have had. 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, the Williams Sonomas, the Nikes 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 investments they made historically in e-commerce, including innovations in buy online pickup and shop, curbsite pickup, you know, directly integrating with APIs like DoorDash, bringing on Instacart for local delivery. they just turned everything on at scale and it's just worked wonderfully for them. So you see this have and have not's 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 because I know you mentioned Amazon at the beginning. Amazon's now not the only game in town and everybody in some ways are gunning for Amazon's market trade. Now, 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 we seen?

You know, niche vertical marketplaces 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 is a second example. But if you look at the private companies, two companies have 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 other there, you have pressure to go buy a bike for yourself, you probably got 20 bikes on the rack to choose from, and you've got to go pick it up, pack it and go home, which is kind of a difficult experience. Curator 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 we, the other kind of niche 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 within 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 touch upon 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 a bit. between Uber and DoorDash and possibly to a lower-exit Instagram in the U.S.

and almost every single company in other parts of the world, I mean, these have now become indispensable for many people's lives, right? So if you take DoDash, for example, they've 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 week and shockingly it sees there's no evidence of slowdown. Now, we do see some slowdown in Uber Eats, for example, and a much deeper slowdown in Postmates and a pretty drastic slowdown in 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 bringing on a marketplace with groceries and safe air coming on board. They've done a really good job layering on products in the overall ecosystem. But this is a worldwide phenomenon. Whether you see RAPI in Latin America or grab in Indonesia and Southeast Asia or coupon in Korea, on-demand systems are here to stay. And the reason I bring up on-demand is Amazon build 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 just to be clear, 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 and a specific company. So our business model, Tracy, is very different compared to the average fund where in the average fund I worked in, so the average fund I know of, you tend to become what I kind of analyst of the week. So you've got to pitch ideas every couple of weeks and then you pitch it to your PM and hopefully go.

to your book. We have taken the opposite business model, something I learned at Ultimita, where I was 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, for a five of us, who between us have, you know, 40 years or 30 years of experience, right? So we 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 in 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. It was very difficult mostly because the markets, if I remember, troughed on March 23rd. and by the time we got dollars in our PB account on April 15th, the markets had rallied almost 31% if I'm not mistaken. It was just tough, guys, because 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 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 go into the market. So we took our time and I think we kind of like elect 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 because, you know, we raised money pretty rapidly through the crisis. And today we're, you know, we're getting close to $250 million in AUM.

So the hard part is, you know, how do you keep up, right? So the challenges were, number one, 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 were just 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 challenges with acquiring supply for Uber. but all that was true.

So Uber had a demand problem first. Now we have a supply problem, but it'll all eventually be good for them. And once the demand and supply works, Uber's going to be an explosive stock, in my opinion. But number three, you know, we were racing 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 easy. You know, anybody who tells you starting a fund as easy is 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 ways through the process. But by June and July, when we finally got our footing, when we knew what we wanted to own, 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 in the NASDAQ because that happens in the 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 foremode 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? Yeah. So, you know, every quarter we put up, we have an internal growth index of software and an 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. Oh, this is good. I want to hear this. Yeah, so let me broadly break it up right now.

So, so ignore the peak. 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, but I think some stocks are incredibly cheap, but not everything's expensive. So let's just break it up, because 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 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 there

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 pretty epic fashion, but its software is not cheap by any definition. Now, we're actually quite nervous on software. We only own two software stocks, but generally software is really expensive.

Then second, we have payments. Payments, same story there. Payments is a new software. And in fact, there's probably even higher kind of like crazy valuations happening in payments. Marquetta just went out a couple of days ago, and that was nosebleed. And DeLocal went out a few days ago, and that was expensive. But they're all phenomenal. Companies in DeLocal, especially is, 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 payments, we own smaller positions. But when it comes to Internet, you know, I want to, I'm going to push back on valuations. So first of all, right, you talk about software being valued on a net revenue basis. You know, in Internet, our framework is we think, 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 long-term EBITDA in our index, it's expensive compared to the five-year median, but the five-year median for that was 23. So you're eight or nine terms about what that is, but that is queued by companies like Airbnb, for example. But if you take internet 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 in bite dance and shares in Pinduodoh and shares in Alibaba in size because those stocks have been beaten down, not on fundamentals, but on overall, you know, 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 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 Google, you know, we own 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 and maps. YouTube is absolutely killing numbers. And oh, by the way, after Thomas Curion took over Google Cloud two years ago, he's done an A plus job in restructuring the cloud business and its go-to-market in sales. So we're seeing evidence of real sales motion 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 internet companies or those are expensive. So we own smaller positions in those. Like, for example, you take a company like Carvana, phenomenal asset, slightly expensive, will grow fast this year, probably beat numbers. But within this category, you've got

some very cheap companies and one of our biggest positions is Feloton, right? So the opportunity in internet is very simple to me. Just like Zoom in the public markets in software, where people are basically assume that once COVID goes away, we'll all return to normal. People have beaten down the stocks of Peloton because, hey, you'll all go back to the gym. And people have beaten down the stocks of others because you think the world will recover,

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 to smaller companies, there are pockets of overvaluation for sure, and 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. I'm curious, like, time frame. I mean, you know, you mentioned that there were a few

tech drawdowns 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 will 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 keep an eye on macro, but we don't trade 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 short term correction went away, we'd come back and these companies would be, you know, two times the size that they were. We left them, right? So we can 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? And we just invested in a, you know, two or three years out, these companies are going to be far larger business than they are today. So the only thing we don't, we should not do and be careful of is we should not be greedy and get overly full mode to chase momentum and pay any price.

But when you pay a, and we're very lucky at this point in time, thanks to the correction in January and then the correction in March and the deep. correction in May and I'm sure a correction is going to happen again sometime soon. All we have to do is make sure that we serve the way reasonably well and use these pockets of pain to, 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 of thought is 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 per stock basis better than most people. So our strategy and philosophy is when stocks are getting paid two or three years in advance, we should not be greedy. We should take some risk off the table because the market, we're actually very happy. So I'll tell you a dirty secret. Last year was a phenomenal year for us and we're very lucky we launched in 2020 despite a difficult start. The reality is all through last year, I was struggling. And I was struggling because each time I thought 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 pain that, man, we 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 with 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 de-risk prices. Number one, if you believe, and again, all our stocks, we have a variant perception on our numbers looking out three years and for the quarter and for the year. But on the other hand, you know, we have shots to take risk off the table. So this is going to be an year where I I think we surf the wave versus trying to be heroes. So I would say that coming out, and 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 comms

over the last last year. And we are going into the peak of, there's 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 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 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 William Sonoma, for example. So, you know, this is this constant tension. 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, once we get to that, you know, high 30s, high-40s levels, you can be pretty sure 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 and then Whole Foods makes it an omni-channel retailer? Right?

And so on and so forth. The Wayfarer has opened up stores. Peloton is omnichannel from the get-go. Apple is omnit-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 next decade may not necessarily be true because at the end they're selling to humans and humans won 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 to 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 components that enable the real world American international economy to compete with the tech giants. And one of those companies, for example, is Databricks. DataBricks provides machine learning components 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 have the will to become online first or online becoming an important component, there are so many digital tools and software that provide these companies, 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 concerns, antitrust. regulation. What is your view on setting aside the regulatory concerns per se? How guaranteed is it that the Facebook's, Amazon's, and alphabets of the world will still be the most dominant companies in the world and say five or ten years? Or could it be that over time, some of the expertise they have does get distributed like you described and that moat that they have, however it is, starts to meaningfully get eroded? So every company, whether it's big or small, should and thus 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 inconquerable in many ways. It's impossible. 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 any time soon. Okay. And maybe YouTube has replacements with TikTok 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 Facebook. But so which is why they are always the cross-hast 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

their lunch. 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 is 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 we're just 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. Facebook, it is impossible to kind of replicate the impact that it has on small businesses around the world, either Instagram or through Facebook, CoreBlue 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, 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 tight pool group for my six-year-old son who loves tight pools, right? Facebook itself is morphing itself. and guess what is Facebook doing? They're taking those dozens of billions of R&D spend every year. And they're saying, listen, we cannot be completely dependent on Apple for distribution. We have 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-enforced errors that these companies do on themselves versus just competition and looking 10 years up. I don't think anything, 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, you know, 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 way. So in Europe, the U.S. and in China, there's this agreement that they need to do something about tech. Why, like, 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 EBDA. And that is why Facebook trades that I think, you know, 20 times or 22 times. And that's why these multiples are by Amazon trades at 16 times EBDA. 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 multiple. 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 finding American companies for a long time. In China, it's very, very real, as we've seen over the last six months. Right? And everyone is now in regulatory huddle down mode. In the U.S., we hear news of regulation. We hear senators, you know, talking to these CEOs in these meetings. And it's not clear to me what's going to come out of it.

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 therefore, where do revenues grow? Where does free cash flow grow? Where does 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 real return, if not of 20, 25%, which is kind of what we aspire to make. And everything else for us is gravy on the cake. It's just all gravy. Like, everything else is 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 reality is, if you take China as a case study,

the Chinese government, when you talked about, there's all this news about and financials or 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' comments, it gave them the reason to go behind Alibaba. And as a result of that, it was they cracked on an and financial, the IPO, which is the right thing to do because you cannot have a consumer lending business in a country as big as

and financial grow at 80 to 90 percent. That 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 were growing. So that's number one. Now, number two is, Alibaba historically was the propagator of certain anti-monopoly practices. But it wasn't that they cracked on Alibaba alone.

First of all, they were cracking down on Alibaba for three years, thanks to pressure from Pindu Odo, which is the right thing to do. but now Pindu and Maituan themselves are on the regulatory crosshairs because they are being quite aggressive in growing a specific form of grocery called community group buying. So what happens to all the people in the wet markets in 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 creates a lot of second order effects that nobody wants. I don't think the regulatory authorities there won't.

to destroy their local champions. So the reason why we're actually quite confident about investing in China is we've been through this pain a few times in the past. We've seen this post-Ali-Baba IPO. We've seen this in 2015 and August 15. So we've seen these pockets of six months to one year where things get really bad. But if you look beyond that one year and luckily for us we have, you know, three-year 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. Now, as an American president, like, I just find it, I'm stressed out when I look at the 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 these companies 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 will create a lot of tension in these companies and the multiples are low,

so maybe they even go lower. And I actually argue that on a longer term basis, if Google got broken up, or Amazon got broken up or Facebook got broken up, it would actually create a couple of incremental trillion dollars on 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 at Amazon stock, at close to $3,000 a share, I'm going to argue that you get the entire U.S. business and the ads business for free. And that's the beauty. We did the analysis of Alibaba. In Alibaba's case, and this is super interesting, it's such a cheap stock right now that in three years under our estimates, if you strip out the value of Ali Cloud and give it a low multiple, strip out the value of and financial, give it a sober multiple, sober equity value, give some credit for their on-demand services and some value for their non-retail businesses, sorry, their retail offline businesses.

you buy the core business, Taubo and T-Mol, 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 I can see. If you did the math there, you get that business growing at high teens to low 20s for four times EBITDA looking out three years and negative EBITDA looking at 5%.

years. You actually get paid to own those businesses. And again, when you think about all the drivers of what these companies are doing, and same thing with Peloton, right? The company is such an incredible machine of hardware and software well verticalized. 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 a month for. So there's just so much tremendous value hidden that is not captured in the headline EPS earnings or the headline EBITDA earnings.

I guess that real quickly, and Rom, 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, they genuinely sort of like went against your intuitions or assumption? Honestly, the entire year last year, Joe, went against my intuition. I guess that's a pretty good answer. The entire year was a surprise. And so I would argue that, 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, Rahm, thank you so much for coming on Oblot. I so appreciated Tracy and Joe. Thank you for having me. Thanks, Ron. That was really good.

Tracy, I really like 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 that. 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 ROM, 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. Like, that seems wrong to me. And, you know, the fact that we are doing this podcast over Zoom, and I'm about to order something off of Amazon, like, 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, I mean, the way as like, I think this sort of like go back to normal is like a bad frame. I mean, yes, like we're going outside. People are going to go back to offices. But his point was like, well, okay, like, that's still going to mean that business, it doesn't mean that businesses aren't going to use Facebook or Instagram for advertising. And I thought 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. No, you know, it's just like another thing that I thought about is this like, you know, people for years of like tech stocks are expensive, right?

Like at 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 at say Amazon's earnings today, I'm certain it's higher. than it was, 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 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, like, you know, as long as Amazon doesn't go bust, which it seems very unlikely to do, maybe that doesn't matter. much, right? It just becomes a sort of like ball of money that rolls along collecting more money and getting even bigger. Right. And again, to be fair, like they do, these companies do seem to crush earnings estimates year after year after year. That, yeah. So there is some, there's also that. That also helps. It helps a little bit, doesn't it? Yeah. All right. Shall we leave it there? Let's leave it there. Okay. This has been another episode of the Oddlots Podcast. I'm Tracy Alloway. You can follow me on Twitter.

at Tracy Allaway. And I'm Joe Wisenthal. You can follow me on Twitter at The Stallwork. And you can follow our guest, Ram Paramishwaran. He's on Twitter at underscore rom underscore. Follow our producer, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today.

And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.