2023-06-19 06:42:47 ET
Summary
- Prosus' stock remains a somewhat unattractive investment due to the specifics of how the company operates.
- The shareholder structure is unappealing and inherently disadvantageous to Prosus investors.
- Maintaining a "HOLD" stance for Prosus above €55/share, as there is no material change seen in the company's future prospects.
Dear readers/followers,
Prosus ( OTCPK:PROSY ) has been one of "those" investments. And I'll be the first one to toot my own horn when it actually warrants it. I first wrote about Prosus well early in 2022, when a reader contacted me and asked me to take a look at the company. What I found wasn't great - and I made that clear in my article.
This garnered a not-unexpected amount of feedback, and a relatively high comment/like ratio for the article, tilted towards comments rather than likes. Usually, on Seeking Alpha, this implies something controversial or going "against the grain". Absolutely no issue for me - I would even say that I more often go against the grain than not, and respectful feedback is always welcome.
However, the theses represented by most of the Prosus bulls since then have gone absolutely nowhere. In fact, RoR is double-digit negative, almost three times as "bad" as the negative 6.8% of the S&P500.
Seeking Alpha Prosus (Seeking Alpha)
This characterizes to me, as a "win", or that my thesis was correct. I have been very clear from the get-go, and in early articles, about what my price target is, why I hold it, and what I base my discount of a 60-70% NAV upon.
Would you like to know what had happened if you had kept to my, and followed my €55/share PT at the time?
Prosus native share price (Google Finance)
As I said, I don't mind showcasing successes. The fact that even today you'd have seen significant profit means that during the time period that I've written on Prosus, my price target has been correct.
Now, I never bought any Prosus shares. I found other, more appealing investments at the time when the company troughed. But I would have been open to it - and I'm happy to provide you an update with why I'm still very strictly a "HOLD" above anything €55/share, but would prefer to "BUY" it at €35/share.
Prosus - I don't see a material change in the company's future prospects in this environment.
The latest published NAV per share comes to around €110.8/share. Discounting this by 60% gives us a target in the mid-40s. I then allow for some premia and for some allowances due to some portfolio holdings, that take us up to around €53.8. Based on this, I'm comfortable doing a bit of rounding off to €55/share. Valuation, which I do early in this article because it's so crucial, is never an exact science. It's a set of assumptions based on financial data and forecasts - it's a range more than anything else, and comparing 5 analysts, you tend to get 5 different sets of assumptions.
What I'm saying, is to take the exactness of these numbers with a spoonful of salt, and focus on the big picture.
The big picture is that Prosus has attractive overall numbers - at least insofar as net margins are concerned. Its structure and overall holdings mean that any application of targets for this company is going to range from low, to insanely high, where the company is currently considered a "value trap" by many (not by me). But more on that later.
The company has given us half-year results for the 2023 fiscal. Prosus remains a play on investing in tech-based growth companies, and it has the ability to report very strong numbers in terms of the top line.
Operating performance is driving e-commerce growth and scale, to where Prosus reports 41% growth in E-commerce revenue. It's also buying back tons of shares - $5.8B worth since June of 2022, in line with its stated goal of a 12-month 7% NAV accretion.
Thanks to its investment in Tencent ( OTCPK:TCEHY ), the company also has access to an essentially "never-ending" cash cow that it can tap for liquidity and has seen the company with $600M in net cash/no debt and $16B liquidity.
The company wants to build technology leaders in a volatile market. Please note that the NAV seen here is not accurate, it's higher now due to the buybacks.
When viewed on that level, the company's business plan makes sense. It's logical, and based on many of its financial metrics, it's easy to understand or believe that the company has created tons of value and profit - which it has. The issue that I have is that more than 90% of that comes from its Tencent investment.
As I view it - and this is my view, I'm clear about that - the company hasn't proven that it can repeat its success.
Why is that, with these sorts of numbers we see here?
Because, dear reader/investor, you may notice that the company presents numbers like "revenue growth" "active listings", "orders", "payment value" and "Monthly StackOverflow users".
What is conspicuously absent from this?
Anything from the bottom line.
Why is that?
Because very few, if any of these companies are profitable.
Don't get me wrong. I understand how these types of investments work at their core, and that periods of unprofitability are necessary for their eventual profitability to come through.
The problem with all of the above-mentioned businesses is that I do not personally believe that they:
a) will become significantly profitable, or
b) become profitable to a level where Prosus can confidently state that this has been a solid investment.
The latest few years of tech-froth and mania have filled me with an inherent distrust towards unprofitable tech that can likely be compared to someone coming out of a Pets.com investment in the dot-com bubble era.
I do not believe that tech investments, that aren't already significantly profitable (and they do exist), will have an easier time in a recession or in a time when capital starts costing more, not less.
Especially not when these investments are things like online ad spaces, online sales sites, forum sites/programming sites, fintech, and meal delivery services.
Do you know what becomes increasingly difficult to monetize when people have less disposable income due to higher interests, inflation and costs?
Discretionary expenses.
Do you know what people do less of, or find free alternatives to when they need to? Most online-based services like ad services, communities, eating out, and similar things.
What it seems to me is that Prosus has exposure to all the wrong things, including unprofitable fintech, going into a very difficult period.
Prosus is not in any fundamental danger. It has Tencent, and that will last the company over a decade unless something fundamental changes there.
However, presentations or data like this do not matter to me.
Because Prosus cannot answer the one question that does matter. When in time or in terms of rev growth, will one or all of these companies become profitable?
Because if these companies weren't profitable during ZIRP, what makes you think 3-5% more expensive capital is going to make that easier?
Take iFood for example. If the latest trading loss numbers are any indication, then the company's revenue, optimistically calculated and assuming the same profitability effects of revenue increases would have to more than double from the level today, making it a billion-dollar company, to bring it into the black. That's not impressive profitability, that's a couple of millions in positive net trading.
OLX Group/classifieds are even worse. The company's 37% revenue increase has actually increased its trading loss.
Prosus IR (Prosus IR)
There are many different ways of viewing this, and I have no doubt many of you can come up with interpretations or models where this turns positive. However, doing so (because I've made such models as well) includes assumptions that I do not believe to be likely related to funding costs, core business growth, and monetization potential.
I believe the current inflation and cost increases globally have resulted in increasing online spending fatigue. We're already seeing this in several online sub-segments - fighting for the customer's spending money is getting harder. The same negative trends are true in Fintech/payments by the way - more revenue growth increases trading losses, and they are especially true in Edtech, one of the most brutal segments I can imagine going into.
A good investor that I used to admire greatly comes originally from education technology - his recommendation was to never go into it. Between private customers and the difficulties of getting into the door in schools and institutions, it's a shark-filled lake, and this bleeds over into this sector and things like StackOverflow as well.
Mind you, I am not calling these platforms bad. They are great platforms. I just consider them unprofitable, and I want profitable investments for my capital.
Prosus Valuation - No, not yet
Prosus remains a Tencent proxy. It's not a bad investment at any price, but I believe it to be a bad investment at this price. Prosus to me is, essentially:
1.) A collection of unprofitable businesses and segments that the company is going to have a herculean challenge in monetizing/making profitable, and
2.) Tencent.
Guess which part of that I consider attractive?
If you look at this business fundamentally, it looks attractive. The company does have a track record of selling businesses and making investments.
It sold Avito for $2.4B. That sounds great - at least until you read up and realize that the company took a loss of $687M in that particular transaction.
So to call the company, during the past few years, anything close to success in its profit-making is a bit of a stretch as I see it. I apply a 60-70% NAV discount to account for the Tencent concentration risk and the unprofitable and, to me, undesirable state of its remaining assets.
It's also important to remember that this concentration risk actually goes up with buybacks. Buybacks increase the Tencent exposure.
Such a discount currently puts us at a PT range of €33-€45, with my latest PT being around €35/share. Any price in that range would be "okay", as I see it, to pay for Prosus. At that price, you're getting the good parts of this company at a discount.
But let me pose you the following question - what if the company didn't have its Tencent stake, or if the company was materially less exposed/less cash in Tencent? What if the company relied upon making what it considers its core growth portfolio into successfully-monetized businesses in a relatively short 3-5 year timeframe?
Would you be as positive about the company then?
I believe few would be. And this is what I base my approach on. Simply put, I question the company's ability to turn its growth portfolio into profitable businesses.
Based on that, and based on what I clearly said in previous articles, I still consider the company a "HOLD" here.
I would accumulate shares at the €33-€45/share range, and I keep my low PT of €35/share.
Thesis
My thesis on Prosus is as follows:
- Prosus stock remains a somewhat unattractive investment due to the specifics of how the company operates and what it has. This lack of appeal has increased, as I see it, as we've moved into a higher interest rate environment where the demand upon the company's investments in terms of profitability - which rely on cheap capital and being able to operate at a loss for some time - has increased. This view has not changed in June of 2022.
- The shareholder structure is unappealing and inherently disadvantageous to Prosus investors. While the company is fundamentally sound and has a good track record due to the Tencent investment, there are too many fundamental question marks to really make this an option for me.
- I would be interested in Prosus if the market decided to discount it more than 70% to its current NAV.
- I consider it a "HOLD" here. My PT is €35/share.
Remember, I'm all about
1. Buying undervalued companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime. Even if that undervaluation is slight and not mind-numbingly massive.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them ( italicized ).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
I can't call this anything except a "HOLD".
For further details see:
Prosus: I'm Doubting The Premium Here