The Update Issue: Tech Investing Lessons from the MoneyShow, High-End Inflation, China Challenges

One of the things I like about investing is that it is a continuous learning process... I started my buy-side investing career at Sanford C. Bernstein, one of the most revered institutional investors when it comes to the value-investing style. I, therefore, grew up as a value investor, laser-focused on free cash flow, discounted cash […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Update Issue: Tech Investing Lessons from the MoneyShow, High-End Inflation, China Challenges By Berna Barshay One of the things I like about investing is that it is a continuous learning process... I started my buy-side investing career at Sanford C. Bernstein, one of the most revered institutional investors when it comes to the value-investing style. I, therefore, grew up as a value investor, laser-focused on free cash flow, discounted cash flow models ("DCFs"), with much attention paid to other valuation metrics like price-to-earnings ("P/E") and price-to-book ("P/B") ratios. Even valuation metrics very much in the mainstream now like enterprise value-to-sales ("EV/sales") or enterprise value to earnings before interest, taxes, depreciation, and amortization ("EV/EBITDA") were shunned as cheating. As I grew up as an investor, I realized I had to add to my bag of tricks. It's well-established that some market cycles favor value, but others favor growth. And then, there are other branches of equity investing like special situations or arbitrage that work independently of where the market is in the value versus growth cycle. Over time, I learned to get good at paying up for excellent companies trading at a premium to the market but not at super outrageous valuations. This is what you would call a growth at a reasonable price – or "GARP" – strategy. Learning to pay up when it is merited by excellence enabled me to profit from owning some wonderful stocks in my career... ones that might have never fit the mold if I had limited myself to very rigid value investing parameters... stocks like tech giants Alphabet (GOOGL), Apple (AAPL), and Microsoft (MSFT). But one thing that has always confounded me is how to deal with companies with no history of earnings or even generating free cash flow. But I recognize that just giving up and not learning how to pick companies with no profit history has led me to miss out on owning some tremendous stocks. For me, the No. 1 example of this would be the streaming giant Netflix (NFLX), where almost 10 years of burning copious amounts of cash – on its way to streaming domination – kept me out of the stock. This one hurt more than the normal screwup, given my intense focus on the media sector. But in the spirit of not repeating mistakes and continuously improving my investing skills, and recognizing that companies tend to go public earlier in their life cycles while they are still unprofitable... I have spent a lot of time the last few years trying to figure out how to buy stocks that could be big long-term winners but aren't profitable yet. The desire to get better at this type of aggressive growth investing inspired me to watch one of the other presentations at the MoneyShow, the conference I had presented at on Tuesday, where I pitched Five Below (FIVE) and Foot Locker (FL) – both of which were reviewed in [yesterday's Empire Financial Daily](. The presentation I tuned into was called "Nothing but Net: Ten Timeless Stock-Picking Lessons from One of Wall Street's Top Tech Analysts," by Mark Mahaney. He's currently head of Internet research at Wall Street firm Evercore ISI, but I had been a client and used his research when he was a sell-side tech analyst at Morgan Stanley (MS) and Royal Bank of Canada (RY). He went over some key points from his book, which shares the same name as his presentation. I found these points helpful... so I thought I would share the best ones with you as a follow-up to what I shared yesterday from my MoneyShow presentation. --------------------------------------------------------------- Recommended Links: [Last week was HUGE]( Last week, Professor Joel Litman revealed the name of a stock he believes could soar by up to 1,000%. Normally, you'd have had to pay thousands of dollars to see his presentation. But right now, you have a limited time to check it out for free. [Click here for the full details](. --------------------------------------------------------------- [Why the FBI demanded to speak to this stock analyst]( If you've never heard about the Alpha Profit Code, it's critical that you learn about it as soon as possible. The minute you do, you'll understand how this little-known investment technique has produced gains as high as 816%... 1,560%... even 2,247%. [Click here for the full story](. --------------------------------------------------------------- The first lesson is kind of obvious to anyone who has invested in tech, but it nevertheless deserves to be repeated... Mahaney's lesson No. 4 is that "Revenue Matters More Than Anything." There are many fundamentals to look at besides revenue growth, there's earnings, margins, cash flow... just to name a few. But when it comes to high-growth tech stocks, revenue is king. The reason for this is that sustained high revenue growth is, in fact, incredibly rare. Only about 2% of the S&P 500 Index has consistently generated 20% top-line growth for five straight years. Historically, the handful of stocks that can pull this off have been material outperformers... and it doesn't matter if they make any money. Adding salt to my wounds, Mahaney gave the example of Netflix. From 2013 through 2019, Netflix grew revenues by at least 20% per year. Its lowest revenue growth was in 2013 (21%), and its highest growth was in 2018 (35%). Between 2013 and 2019, Netflix also burned $10.8 billion. This is why I didn't ever buy the stock... burning almost $11 billion is like Kryptonite to a value investor. But focusing on the cash flow and not the revenue growth was a mistake for me with Netflix... and a common mistake that will cause investors to miss the biggest tech winners. But not every company with high revenue growth will eventually be able to turn the corner into profitability... Some business models aren't that good, and greater scale won't be enough to overcome lousy business economics. This makes indiscriminately buying high topline growth in the absence of a profit history very risky... you could make a fortune, but you could also lose all your money. Mahaney has four "Profitability Logic Test" questions that he asks when considering an investment in a high-tech company with no history of earnings. The questions are... - Are there any public companies with similar business models that are already profitable? - If the company as a whole isn't profitable, are there segments within the business that are? - Is there a reason why scale can't drive a business to profitability? - Are there concrete steps that management can take to drive the company to profitability? I think these are great questions and plan to work them into my analytical process as I strive to get better at high-growth investing. On the hot topic of inflation, one very high-class problem caught my eye... Regular readers probably know by now that I think luxury goods – or at least the most elite players in the business – are among the best businesses in the world. The best luxury brands have huge moats built up in many cases over 100 years or more, and the outrageous prices they charge lead to very fat profit margins. The appetite for luxury goods in Asia generally, and China in particular, is voracious... and as per-capita wealth grows in the region, so does the demand for luxury goods. On top of all that, much of the Western world is locked in the grips of rising income inequality. This may not be great for society, but it is a great setup for luxury-goods companies. The rich keep getting richer and have even more money to blow on $5,000 handbags and $1,500 shoes. These dynamics, as well as product scarcity, give the very top luxury-goods players incredible pricing power, allowing them to take price far above any cost inflation they might experience... pumping their margins up even more. It's this pricing power and the fat margins that follow that make French luxury-goods conglomerate LVMH (LVMH) among the most consistently high growth, non-tech mega-cap companies in the world. Last November, I wrote about the [big price increases]( that LVMH and other top luxury players were able to push through in handbags, despite all the uncertainty of the pandemic. LVMH raised bag prices in high single-digits, and in some cases, as much as mid-to-high teens. Not to be outdone, privately held Chanel hiked the prices on its bags, with the price increase on its most iconic "flap" bag styles as high as 15% to 21%. Here we are a year later, and Chanel is raising prices again... And this comes on the heels of a price increase just four months ago, when the classic flap bags went up on average 15% in price. Now just four months later, it looks like prices on the flap bags went up yesterday between 9% and 16%, depending on the style...  Source: PurseBop This latest price increase caught my eye because of a flood of activity in some chat groups I am in – much of the conversation centered around the psychological barrier of five figures for a bag being breached. Rival luxury house Hermès (RMS.PA) has famously sold bags that cost tens of thousands for years... but it was a real shocker to see a staple of the Chanel lineup hit $10,000. But the more shocking thing in the chat was the number of people desperate to locate one of these $10,000 bags before the price went up yesterday. There is a severe shortage of these $10,000 bags... or at least at the then "bargain price" of $9,200. It's all kind of obscene yet fascinating at the same time... but there are a few takeaways here. First, there are a lot of very healthy consumers out there. Whether it is gains from stocks, crypto, or something else... the high end is in great shape and looking to spend. Second, controlled distribution is a powerful thing. There is manufactured scarcity at Chanel, and that scarcity allows them to take insane price increases. It helps explain why athletic giant Nike (NKE) – also one of the best brands in the world – is working so hard to control its distribution, even though it operates on a much larger scale than a company like Chanel. Finally, in an inflationary environment like we are in, look for companies that have pricing power. A reminder of how hard it can be for Western companies to operate in China... The revenue potential in China is enormous – just ask the luxury-goods companies who have done so well there... but it isn't an easy place for Western firms to operate. Last weekend, media giant Disney (DIS) was reminded of this when more than 30,000 visitors got locked into the Shanghai Disneyland Park for hours... forced to have a COVID-19 test before leaving after just one guest tested positive. The Wall Street Journal described the scene: With fireworks exploding above them as they awaited nasal swabs, the Disney visitors became the latest Chinese residents to experience life under a "zero tolerance" policy for the virus enforced by their country's government. Leaders there have taken stringent measures to contain pockets of the coronavirus in the country, despite criticism from business groups and a close to 80% vaccination rate. "I never thought that the longest queue in Disneyland would be for a nucleic acid test," one visitor said on social media. Here's a picture of the chaotic scene...  Source: Associated Press Disney owns 43% of Shanghai Disneyland Park, in a joint venture with a state-backed group. Park management tried to make the best of it, putting up an impromptu fireworks display, handing out phone chargers, and letting families with young children through first for testing. In the end, none of the 30,000-plus guests tested positive, and after a 48-hour closure... the park was back in business. But it's a reminder that when doing business in China, you do so at the whim of the government, which is currently pursuing a zero-COVID strategy. In the mailbag, one reader offers a Snapchat use case that isn't just for teenagers... How do you evaluate high-growth tech companies that aren't earning money when you are considering them? Do you think valuation even matters at all when it comes to high-tech growth investing? What's the most you would ever pay for a handbag, briefcase, or clothing item... does $10,000 strike you as outrageous? Share your thoughts in an e-mail by [clicking here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna). "Hello, Berna, while I would like to say I am a kid, I am indeed 36 years old. I run a direct sales organization, and I employ a lot of young adults in their 20s, and they keep me young and on top of all the latest social apps and trends. "What I absolutely love Snapchat for, though, I must share. If you go to the Snapmaps section of Snapchat, you can click on anywhere in the world and see the pictures and videos people are 'snapping' at the time and recently. While I [had] explored the curiosity of, 'Huh, I wonder what people in India are doing right now... ?' when I first discovered this, I mostly now use this feature for news events and natural disasters. "For example, during some of the major hurricanes in recent years in the U.S., I personally had much more of a ground view than any news organization was showing, as someone is always posting a video of what it looks like off of their front porch or roof! "Last month, when the country of Guinea had a coup, for example, I went right to Snapmaps and saw a lot of the unrest in the country that the people were posting. "When we pulled out of Afghanistan, I saw around the bases the videos people were posting there, of them either showing some day-to-day activities with unrest in the background or actually posting some of these videos in panic themselves. "I highly recommend using the app for this reason, as it is quite intriguing during a major event! Additionally, I can tell you that it is far closer to the action than the news crews usually are. "Ah, lastly, I always opt into app tracking. I personally would rather have any ads actually targeted to my location. I honestly don't get why people are so averse to that. My sentiment is if you truly have nothing to hide (and I don't), then wouldn't you rather see relevant content than not? "Thank you," – Kim Y. Regards, Berna Barshay November 4, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2021 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](