Hedge Fund Managers Top Investments With Fred Liu

Hello, my name is Drew Cohen and you are about to listen to an interview with hedge fund manager Fred Louu of Hayden Capital. Now, this interview originally aired on our podcast called The Synopsis, where if you prefer to listen to there, it’s available on Spotify, Apple, wherever else you get your podcast. There’s also a lot more episodes on that feed that we do not publish on YouTube, so you could go ahead and check that out. But if you don’t know who I am and this is your first time on this YouTube channel, you can find a lot of deep dives on specific companies in the backlog as well as a lot of other finance and investing related content. I personally used to work at Goldman Sachs, later at Capital Group, and now I’m a registered investment advisor managing money for high- netw worth individuals. Now, that is enough of an intro though. Without further ado, let us begin. Hello and welcome to the synopsis, a podcast for professional investors. My name is Drew Cohen and I’m really excited for today’s interview which is going to be with hedge fund manager of Hayden Capital, Fred Lou. Fred, welcome.

Thank you, Drew. I appreciate it. It’s been a couple years in the making here, so I glad we finally had a chance to do this. Yeah. And I I’m really excited to talk to you, too, because you um invest in a lot of interesting businesses. uh you’ll take relatively concentrated positions too and we’ll talk a lot about different stocks that I think a lot of our audience would be interested in. But just to kind of kick us off, why don’t you say a little bit about your investment philosophy? What kind of investor are you? Sure. Um I would say that our specialty is really within the tech space. Uh and we invest globally. Um we hold a very concentrated position uh portfolio of about fif uh five to 15 names and we’re really looking to compound our capital alongside of these businesses as they become more valuable over time and the best proxy for that is probably free cash flow or earnings growth over time. And so we’re really looking for companies that can 3x or 5x uh their earnings power over a decade plus um and hopefully uh buy these businesses at a fair to cheap valuation and really compound our capital alongside of that growth. Um I would say where we really started was in US and in Asia about 10 years ago. um and especially on the consumer internet side. And our core at the time was probably e-commerce business models. And since then, we’ve both expanded uh industry-wise into consumer entertainment, uh fintech, um you know, with this latest software draw down, we’ve started to understand uh get up to speed on software a little bit more. Um, and then geographically, you know, historically if you’re going to invest with businesses for a decade plus, um, especially within tech, a lot of these businesses change over 10 years. You know, you think about what Amazon looked like 10 years ago versus what it is now. It’s a completely different business with multiple different segments. Um, what doesn’t change is really the founder and the culture that they instill in these businesses and how they really um, you know, direct their teams to make decisions. Traditionally, we found the best entrepreneurs in US and Asia and that has started to expand outwards as well. You we’ve started doing a little bit more Japan and a little bit more LAM in the last couple years. Yeah. What are a couple of those entrepreneurs uh that you really like? Yeah, I’m sure we’ll touch about it uh touch upon it uh soon, but you know, we’ve been longtime investors in C Limited. Um you know, it’s been a volatile stock, but I really admire the business that they’ve built over the last 10 years or so. We’ve been investors for about eight years at this point. Um we’re really looking for owner operators who are not afraid to make um call like against the grain decisions that maybe professional boards or you know professionally run management teams um might be a little bit more hesitant to to make. Uh these are businesses that can pivot quickly, react quickly to changes in the market, launch new businesses even though it might temporarily depress cash flow for a couple years to really try to capture and have greater odds of achieving a much bigger pie in 5 to 10 years. That’s what we’re looking for. Yeah. Okay. So that would be Forest Lee for C Limited is is one of those entrepreneurs. Yeah. Um do you find a lot of similarities between all these entrepreneurs you’re looking at or is each one kind of different? I mean they’re all different in some sense right the background and the skill set that you need to build these businesses is very different you know some may have worked at large firms or you know venture capital or um you know another large corporation before and some of our the companies that we own you know they were started straight out of college right and the founders have never had any professional management experience before uh so I think it really differs but you know the skill set that we’re looking for or more the personality that we’re looking for is someone who is willing willing to think outside the box and disrupt the status quo. And in order to do that, especially in I’d say like more conservative cultures like you know some parts of Asia um that’s actually if you find a person like that that’s actually a really good signal right because they’re going against the grain of what you know society has kind of uh yeah traditionally taught you what success is. And so finding these entrepreneurs in these type geographies is really um yeah it you probably have greater odds of finding something differentiated there and them having greater chance of being able to disrupt the incumbent industry. And I I want to highlight something you mentioned on the intro which is that your positions will be anywhere from 5 to 15. So five is not very many positions uh for an investment fund. So that is a very concentrated portfolio you can be running. So, how do you build confidence in that? And how do you, you know, also just withstand, I would imagine, what must be pretty high volatility? 100%. I mean, look, we’re investing in what I would call like emerging tech businesses or emerging compounders. Um, number one, it’s one sector and number two, it’s uh a highly volatile sector because at the point that we’re investing, generally, these businesses are like 1 to 10 billion dollars at market cap. They’re still relatively small, largely ignored by the street. uh haven’t been included in indexes. So there’s no natural buyer. And more importantly, on top of that, these businesses were probably founded in the last five to 10 years. And so they’re relatively newer businesses. Earnings stability has not been achieved yet. You know, earnings are still volatile and these businesses are still evolving and they’re still investing in new things. And so what actually drops the EPS and the, you know, steadystate margins, it’s not showing up in the financials. And often times they may have a core business that’s really reinvesting into a brand new business. and the core business might be say 30% margins but they’re reinvesting all that cash into new business and so it doesn’t screen well either right it looks like it’s trading at like 100 times earnings um and so yeah because of that definitely a more volatile portfolio and so you know all of our uh partners you need to understand that and be comfortable with that and then on top of that um I would say like our portfolio really follows a power law type of dynamic and I think you can see this among like most investors like whether um you know it’s Berkshire Hathaway you know top couple I you know ideas that they’ve had or positions that they’ve had have really generated the bulk of the returns over the last couple decades um and you can see that with similar other funds too regardless of strategy and so our portfolio I’ve given um stats on this in our letters uh before over the years but basically the top 20% of ideas generates all of our alpha and you know the other 80% kind of just nets out um we don’t tend to lose much money on our losers um at least from a total NAV perspective because of how we structure the portfolio which is when we’re buying an earlier stage company where the our conviction is still loosely held. Um we’re still looking for data points to go um you know corroborate our thesis. Um these businesses are still are going to be very small. They might be like tracker positions at you know less than 2% or it might be like a smaller core position at 5 percent. But very similar to let’s say like a growth equity portfolio where you know you’re looking for certain KPIs to prove that your thesis is on track and as you hit uh different metrics or you hit those KPIs and it proves that you know this is actually trending in the correct direction you’re probably going to top up and add more money because the odds of them achieving you know that fivex EPS growth in the next 10 years has just increased right the range of outcomes has narrowed and so your downside case is probably no longer in existence and expected value has moved moved up and so even though the stock price has maybe moved 10% maybe your EV has gone up 25% on that data point print and it kind of proves your thesis is on track and so we’re going to continue to add on to these um and so newer positions are going to be about 5% um but obviously a much wider range of outcomes and range of uncertainty there um and our core positions are going to be 10% plus and our larger positions that have kind of grown into it um that we just allow our comp capital to continue to compound alongside of them they’re going to be call it mid- teens to like 20%. And as those uh stocks, assuming you’re successful in picking them, continue to grow, would you ever trim that or are you fine just letting that continue to become a larger portion of your portfolio? Yeah, I think uh it depends, right? Um I I wish I could draw something for you here, but uh basically I think over time, you know, 10 years ago, my 10 years ago, my thesis was that we’re going to buy earlier stage businesses that have greater earning earnings variability and the market is not confident in what the business model ultimately looks like. And if we can get greater data, whether through channel checks, alt data, etc. to really underwrite what the incremental unit economics look like and gain confidence in that before the street we can buy these names at a very cheap price because the market is discounting them. Um and over time as earnings kind of proves itself out you know growth maybe these earnings grow you know 30 40% kagers in the early years and then the variability of earnings also decreases you should get a higher multiple as well as the market gets confidence around it. So, not only do you get EPS growth of call like 5x, but you also get multiple expansion of maybe 2x and that’s how you get a 10bagger, right? Um, that’s historically how our portfolio has been structured. But also, um, I think markets have also changed a bit in terms of there’s more volatility inherent in markets. When you see names like, you know, Netflix that are several hundred billion dollars swinging 40% in a couple months, um, I think there’s just less long duration capital out in the markets today. And so because of that, you know, our portfolio may swing it there the the the stock price um path may be very volatile and at like a temporary peak it might be like a 15% cake or irr at the bottom of that trough you know in a draw down like where we are today maybe it’s like a 30% irr. you know that fair value of that business we’re still underwriting to say you know 20% or 25% right but that 15% at that temporary peak is still greater than what we think the general market um will achieve let’s call like&MP has historically done about 10% it’s still better than what the S&P return is right historically we probably would have just continued to keep it and you know um accept the volatility um but I do think that markets have changed a little bit and so we’re starting to uh think if there’s maybe a little bit more alpha by being tactical around it and being able to um understanding that markets are more volatile will probably get a chance to buy it back when it’s about like a 30% IR at the bottom. So, you know, our our um our thinking around, you know, position sizing and trimming has changed a little bit. Um but in in general, we’re hoping to own these businesses for yeah, five to 10 years, assuming uh IRS don’t get too compressed here. So, if I were to paraphrase what you were just saying a little bit, you’re kind of saying you want to increase your hurdle rate because you’ve noticed how volatile uh these stocks can be. Yeah, that’s correct. Um, we’re still exploring that right now. Um, and so I can’t promise that, you know, there’s going to be any drastic changes in our portfolio over the next couple years, but I I just think that there’s probably a bit more alpha that we can squeeze out given the change in the way that markets uh react, especially in our sector. Yeah. Okay. And then kind of zooming out a little bit, just overall your investment strategy seems to be this idea that there’s a lot of these emerging companies with we’ll say a large probability distribution of outcomes, but you believe through superior interest and also just the fact that a lot of investors aren’t really looking at these businesses that much. They’re not doing very deep deep research on them. You can gain higher confidence that this probability distribution it’s narrower than what other people expect. And so those are the kind of opportunities you find to be attractive. Yeah, 100%. Or even if you know the market is pricing a range of outcomes that’s very very wide, maybe we don’t have any differentiation on how wide that range of outcomes is, but because of market volatility and you know it might be a new IPO, it might be a billion dollar company that no one cares about etc. The market is pricing it almost at the bottom end of that range of outcomes. And so it’s almost all upside, right? If something good happens that is unexpected that is not priced in the stock, you know, the stock is inevitably going up. And so we protect the downside by in multiple ways. These might be earlier stage businesses and they might be you know more volatile businesses but you know there we’re almost buying growth at a value price is when we buy these businesses. And one example is for instance if we’re buying it at the bottom of that range of outcomes you know um there’s very little chance for that business to lose money because not much expectations is priced into that stock. Um you know for instance one company that we’re looking at LAM right now it’s priced at six times earnings and growing earnings 80%. Right. Um and it’s a billion dollar company and trades only a couple million dollars a day. So there’s just not much interest in it. Um and so I think that’s why the market is kind of mispricing it. Um but you know the another case might be a lot of our winners have come from a core business subsidizing a new business where if that new business is successful it’s going to 3x you know the entire size of of the company or the value of the business. Um so one example might be like C Limited back in you know 2017 2018 they had a gaming business was that was doing 400 mil of uh IBIDA. Uh we bought the business at about $4 billion. So 10 times zebra and the street hated it because they were reinvesting all that cash flow and more into a b into a e-commerce business that was very nent and number two player behind Lazada which is being backed by Alibaba and everyone was like why does a gaming company have a right to win but you know in that case let’s say you knew nothing about e-commerce business but you knew that this team wasn’t dumb right they weren’t irrational if the e-commerce business didn’t work they could always shut that down right and the gaming business itself was continued to grow at a very high clip and so you know that 400 may have been 600 in a couple years as well and so you it’s very hard to lose money on something like that. Um another example might be we invested in Afterpay in 2019 and everyone was like what is BMPL you know why are they spending so much money on the US etc. But if you actually study their Australian business and they had been listed for many many years on the Australian exchanges um I mean it was a 30% margin business in Australia um and also growing like in the mid20s right um but they saw the opportunity in the US and the US is a market that’s 10 times as large and when we did calls with merchants and like really understanding like why are merchants starting to accept BMPPL what are the conversion rates how do conversion rates differ than credit cards how does it bring in a complete new set of customers to them. It was the exact same commentary that we heard from US merchants as like Australian merchants. And so you also saw on the demand side that people were downloading the app and using the app. And so you kind of knew that demand, consumer demand was there. Um, and you could understand why people would use a product like this. And so it’s like the US seems like a very high odds chance of succeeding. And if it does succeed, it’s going to be 10x the business of what the Australian business used to be. But the stock was being priced, you know, around like 20 times earnings or so just on the Australian earnings alone. Um, and that was already a proven business. And so, you know, again, I I think our downside was protected because even if the US business didn’t work, you know, they could shut that down and you would still have value in Australia. Yeah. And I don’t actually disagree with what you’re saying, but I’m going to push back anyway. I think one of the reasons maybe why investors don’t like those opportunities is because if it doesn’t work, it kind of suggests that um maybe management is not going to be allocating capital well. Also, if it doesn’t work, maybe they’re going to double down, put even more money into it. Uh because there’s not that many examples of a an entrepreneur saying, “This doesn’t work. I’m going to shut it down. That’s it.” You know, and and I’m not going to keep going into these other bets. I always met where I reality doesn’t need to work if it doesn’t spend $20 billion uh a year forever. That’s Mark. Uh eventually he’s going to shut it down or it’s going to work or it’s going to break even. But you shouldn’t be putting that in into your multiple because then you’re basically implying they’re losing that money forever, which is the point you’re making basically. And I’m trying to argue, well, you know, maybe sometimes these managers, it suggests that they are going to burn money in all these different areas and and maybe they’re not that great at making money. And at the time, if we’re talking about C Limited, um, and you could correct me if any of my knowledge here is wrong, but Forest Lee really, uh, he had this partnership with Tencent. They were building, you know, they had internet cafes and, you know, they had a little bit of success with Coney, but it wasn’t that big. It was more about just an enabler to getting people to to pay uh to pay for these video games. And then, you know, they acquired uh Free Fire. Uh that wasn’t a game they actually built themselves. They It was acquired from some Vietnamese studio, I believe it was. And so, they never had this big history of building these big businesses. And so, what right do they have in order to, you know, think that they’re the ones to be able to do this? Yeah. Uh look, that’s number one, 100% fair point. Number two, I think most management teams are empire builders. They’re not actually rational, right? They’re here for ego. They’re here to, you know, grow revenues. they’re here to build as big of a business as they can and manage as many people as they can. Um, you know, I I think the companies that you want to invest behind are, you know, those who are more rational capital allocators and are not afraid to call quits on something that is obviously not working. And, you know, since you bring up C Limited, I would say, you know, a lot of people in the market definitely hated that they went into like India and Eastern Europe, you know, a couple years ago. Um but our understanding and you know we had heard this directly from the team was that they saw an opportunity to basically spend a couple billion dollars about4 billion in each of these markets to create $40 billion of value. Um and they had historically you know they they had already entered Brazil a couple of years before that and they had done it in Southeast Asia as well. GDP of these regions were roughly the same. Um you know GDP per capita was roughly the same. E-commerce penetration roughly the same. So they experimented in all these markets, right? Um but very quickly when they you know needed to rationalize a little bit more quickly than they had originally anticipated, they shut down Eastern Europe and in India as well, right? Um and so they were not afraid to kind of make that pivot really quickly. And so even though the market hated them and punished them for that, we actually view that as a positive because this kind of proves to your point that this team is not completely irrational and just going to come spend into oblivion, right? Yeah, let’s talk a little bit more about C. So they, you know, are started in Southeast Asia. Um, that was their focus. Uh, as you mentioned, they, you know, started in video games. That was kind of their cash flow. They also had, you know, C money for financials. That wasn’t huge, but it was part of kind of enabling the video game business. And then they got into e-commerce. But, correct me if I’m wrong, this was around 2014, 2015, somewhere around there. There was a lot of competitors in e-commerce. They were not a first mover. Um, I I know there’s Lazada that you mentioned which was owned by Alibaba. I believe there’s also Tohopedia. Um, I think GoJ also kind of had its own um Go Jack and Grab both kind of had their own uh commerce offerings as well. And I I’m sure there was a bunch of other little ones too. So, if you’re looking at this at the time, and I don’t know exactly when you got involved in C Limited, maybe that’d be helpful um to this answer, but at what point can you actually gain confidence that this isn’t just another one of these e-commerce marketplaces, but I actually think they have a sustainable competitive advantage here? Yeah. So, if you go back to like 2018 when we first invested, you know, Shopppee had already been around for roughly 2 years or so. Um, and sorry, Shopppee is the name of their e-commerce platform if people don’t know. Yes. Um, and I think what’s interesting is like we had studied e-commerce extensively before and you know if you were building an e-commerce business from scratch, what would you want it to look like? Number one, you would want it to be mobile first. Um, because a lot of the population in emerging markets first experienced shopping online for the first time through a mobile phone versus desktop. And the reason why that matters is because if you came came into existence in a desktop world um your website and user experience is going to look very very different. Um on a mobile phone there aren’t really many apps. Your apps need to be lightweight. The app needs to be more engaging. It needs to go through multiple verticals. And it’s the reason why for instance super apps are more prevalent in emerging markets versus say the US where you have apps that dominate each individual vertical. It’s because on a desktop it’s very very easy to switch between tabs and switch between websites versus in an emerging market you might be on a $100 Android phone. You just don’t have that much memory and that much you know uh space on your phone to download a lot of heavyweight apps. And then number two it’s very hard to switch between apps to like price compare and etc. Um, so you’re going to see a higher prevalence of super apps and also uh apps that dominate multiple industry verticals for that reason. So you want to go mobile first. That’s number one. Number two is you probably want to go longtail. You want to go after categories that are hard hard to price compare and are not as commoditized. So what I mean is like branded products, right? Like you know a Dyson hairdryer is going to be the same exact product no matter what website you go to or like laptops etc. These are thin margins, high value products, need a lot of trust with the consumer. Um, and also it’s commodity commoditized, right? But if you’re talking like unbranded clothing or beauty products or, you know, homegoods, uh, these are all completely um call unique to the platform, it’s very hard to price compare. And if you can build your app in a way that is engaging um and get people to continue to come back to the app and spend 30 minutes a day within it, you naturally don’t need to reacquire customers, right? And so the difference between what Shopppee had built in the early days versus Lazada and uh Toipedia is that Lazada and Tokipedia really started off in electronics in a desktop world. Toedia was starting started in like 2009 for instance, right? That was a very much desktop-based world. Um, and Lazada’s first product they ever sold was a laptop, for instance. Um, these are products that are more maleheavy, uh, more branded items, heavier value items, and lower margins. Shopppee went the complete opposite direction. They went after fashion and beauty and like uncommonized low low dollar value products first. And what was unique was that their female tomale uh ratio of uh shoppers was much much heavier skewed towards female versus the other two platforms that I just mentioned are much more male oriented. Um, in addition, why that matters is that if you’re building an e-commerce platform, what matters is like you need to build trust with the consumers and you need like density of reviews and female shoppers, you know, for whatever reason is that they actually let uh leave much more detailed reviews on these products. Um, I remember at a shoe seller day, they literally gave a slide of, you know, why you should go after female shoppers because they’ll write like two paragraphs of why this product is great and then compared to the male review might be like A+ great product, right? Doesn’t give you much info, especially as an early um early platform. So, that’s what they did, right? And what we saw was like people were spending 30 minutes to 60 minutes a day on this app, right, on a shopping app. And especially in emerging markets where like more sophisticated forms of entertainment are not available, right? It’s why like if you go into like rural Vietnam or Indonesia, you know, people are just scrolling on their phones or even rural China, right? You’re scrolling on your phones all day and shopping is a form of entertainment. You can’t really do that with like a more desktop oriented boring app, right? Like Amazon or something else. Um, and so that’s what originally attracted us to it. We thought it had like the ingredients to make a very sticky platform and it very much followed the model of both Ping Dodo and Talba in China and what they got right. So we could see like early signs of what led to their success and Shopppee was starting to adopt the same things. Um and you know that was the original ingredients but as we gained more conviction um you know what what we heard for instance was talking to Lazada employees. I would like meet go to like Koala Lumpur and go meet them some middle-level employees and they were like um number one Lazada was a mess culturally because they used to be a rocket internet company was sold to Alibaba. Alibaba tried to like centralize management. The CEO was sending emails and Mandarin and like employees on the ground were like trying to translate it with Google Translate. It was just a complete mess culturally. And then number two, what we heard from Lazada employees was like I literally asked them like what do you own personally in your personal portfolio? I just remember this moment distinctly cuz it was in a cafe in Koala Lumpur um in a mall and they were like yeah we own shop 8 we own C Limited as our largest position. I’m like why? And they literally said because whenever Lazada launches a new feature like we might be the innovators on it but shopppee is going to copy that within 2 weeks and they’re going to do it three times as better like three times better right and it’s like there’s no real moat to like e-commerce um you know especially in the early days when all these platforms are still pretty nent e-commerce penetration is like 5%. Um, but there is a moat to execution, right? And moving quickly and acquiring users and getting them addicted to your app and locking them in. And that’s what shopppee did really, really well. Yeah. So, I want to paraphrase a couple of the things you said there. So, low order value was a big one. That meant that people could shop more, so then you could get like a higher purchase frequency. They gified the app. It was more entertaining to be on the app. um it was built for a mobile phone in an environment where people kind of had cheaper mobile phones. It wasn’t a very heavy app. So part of that’s the web engineering of that and then maybe we could also add you know another element to the fact that in addition to it being female shoppers uh who I know for would say are like the taste makers. Uh it also means that when you’re shipping something like clothing, you don’t really have to worry about it being damaged. It tends to not uh be a very um high sensitive uh delivery item. You don’t need it like tomorrow. So people are more patient with it and so all of that kind of helped them build a foundation and then from there they were able to um continue to grow and it I can understand all that in the initial stages where you know you kind of see it gaining a little bit of momentum and all that but you know to your point you’re still talking about a company that’s low ecom penetration you’re talking about still going up against Alibaba. there is still toipedia. There is still this option. I at least I kind of vaguely remember Grab and Go Jack were saying maybe we’ll get more into commerce and they had pretty popular um super apps depending on what um geography we’re talking about and how hard would it have that been for them to add different um you know e-commerce options in there and then you know what is the real moat at that point because ultimately you know an e-commerce company it needs to have you know a large amount of merchants on one side consumers on the other side and until it really gets to to be so formidable that other people don’t really want to try to crack that network effect. There’s not a lot of moes in these businesses. You know, you don’t have anything like Prime either giving lock in. And so, at what point in this investment did you really gain confidence in it? And maybe it started as one of these, you know, smaller kind of positions, but at what point was it I really have a lot of confidence C Limited is going to be the dominant platform in in Southeast Asia. Yeah. I mean, it really started at like low single digits, you know, 2 3% position and it’s become our largest at like 20, right? Over time. And what year was that? That was 2018. Uh yeah, when we first invested was

2018. And along the way, basically we top up along the way, right? As I mentioned before, as they hit certain KPIs and so certain KPIs might be, you know, you when you’re building an e-commerce platform from scratch, you really need to focus on the supply side because a variety of suppliers and a variety of products are naturally going to attract buyers, right? And so you don’t really need to spend as much uh you know acquisition cost on the buyer side. what you really should be spending is on the supplier side. And so what we wanted to see was like variety of suppliers across each industry vertical and we were like web scraping the stuff essentially right comparing it versus other other platforms. We were you know comparing price and number of merchants in each category. So we when we started to see that density exceed like Lazada and Toipedia that’s really when it started um you know giving us more conviction that something is working here. In addition to that, not only do you want to see variety of suppliers increase, but you also want to see order frequency, right? Because the more times a shopper orders on your platform, the more addicted they are and the more they have mind share. Um, because like I said, these are low-end smartphones in emerging markets. You don’t have very many apps installed. And so, if you know, Shopppee is one of three apps that’s on your phone. Like, you’re going to naturally click that first, right? To like see what products are available. if you are, you know, bored and just want shopper tamement or, you know, to buy actually buy something. Um, and so what we wanted to see was order frequency reach almost China type levels. And so when we originally invested, the average shopper was buying about two times a month, but you know, Lazada was like once every couple months. And the reason was that, you know, a lot of the male shoppers, like I said, they started off in electronics. It’s where they really had their like brand uh brand around and mind share around. you know, you’re not going to buy a new laptop, you know, every couple months, right? You’re going to buy it maybe once every couple years, right? And so, they didn’t really have the mind share with with the customer. And so, what why C being so addictive was valuable and getting people to spend inside the app was because they could lower their customer acquisition cost and then keep people coming back to the app for free and build it that way. And so when we saw time spent increase and also uh order frequency increase to start approaching China levels, we were like, “Okay, something’s working here and people are starting to get addicted to the platform.”

And so it was once you started seeing those metrics, that’s when you took the position sizing up even more. Yeah, definitely. And it happened really quickly because like order frequencies went from like two to four like within two years essentially. And so you could see was this during COVID? Uh it even happened before COVID. Yeah. like late 19. Okay. Yeah. It’s interesting when these e-commerce companies are are late comers and I’m thinking of Kong too who we’ve talked a little bit about where they showed up really um getting into first party and trying to become this full chain platform uh e-commerce logistics experience really in 2017 kind of 18 and you know now they’re the most dominant player less than a decade later whereas we’re kind of used to hearing the story of Amazon you know starting in the late 90s and taking a long time to build that position and it’s just kind of interesting how a lot of these markets are a little different and I did want to touch a little bit on the the Chinese e-commerce market in specific because we are talking about these different e-commerce players and you know another really interesting one is Pin Voad which I know you’ve invested in in the past you don’t currently hold it but that was a very interesting business because they totally displaced in an incumbent which many people at least you know from from the outside world living outside of China would have thought Alibaba had a much more dominant position than Pindua expose them to have. So, I I’m just kind of curious um what your thoughts are on it. I’m forgetting his name if it’s if it’s Colin something. Colin Hang who’s uh Yeah. who’s the the CEO of that business or was um and kind of how he kind of built that to really displace Alibaba. What What did you see in that investment that that really attracted you to it? Yeah. Well, let me take a step back too because let me address the Amazon thing because every time you see Amazon announce that they’re going to enter a market, you know, stocks in that sector are like down 10% because everyone’s scared of Amazon. But if you actually look at what Amazon has done globally, they’ve tried to go global for so long. They’ve been in Brazil for like what 14 years at this point. They have, you know, uh, presence in Singapore. Uh, they tried to enter China, etc. they have failed in every single market globally outside of the US and maybe a little bit in Germany and a little bit in the UK right um but in most markets globally they haven’t done a good job and the reason is that in a lot of these markets you know GDP per capita or income levels are much lower and so the things you prioritize are different right and so Amazon is known for logistics you know trust high quality items and you know quick shipping speeds right um in a lot of these markets If GDP per capita is $5,000, you know, your disposable income really isn’t that much, um, what you really care about is price more than delivery speed. And you care about shopping almost as entertainment in a form, right? Um, and you want to go after low AOV products, which again is hard for Amazon to justify, you know, same day or next day shipping on, you know, a $2 item, for instance, um, especially in these markets. So I think um the way that you need to build for these different markets, the business model that you approach it from is going to be very very different depending on GDP per capita, you know, when did this country kind of enter enter the online commerce phase, was it through desktop, through mobile, what are consumer habits, etc. Um and I think to your point about you know uh Ping Dodo kind of being like a second mover, I actually think it makes sense. um every single business that they’ve entered it, they have never been the pioneers. They have always been the fast followers and copers. And the reason why it’s beautiful is that you know when you are developing a new product or a new business model for the first time, you don’t know how consumers will react to it. You don’t know if consumers will like it. You don’t know how much on average they’re going to spend, you know, for every order. You don’t know how frequently they’re going to order, etc. So they actually let other startups spend that R&D and testing money first and then they see what works, what doesn’t, what are the mistakes that they made. And in China especially generally you have like dozens of these startups VC back just burning cash and to kind of find a business model and spend their way into a business model. And then when these companies start to you know run out of cash and go bankrupt etc. PDD will come in, learn from all of their mistakes, and then enact a business model that actually was proven to to work and then spend that capital more efficiently. And especially in earlier stage businesses, let’s say you have like 1% penetration of a market, right, of the total addressable market, that’s not very hard to overcome and to catch up on, right? If you own like 50, if an incumbent owns 50% of market, then yeah, that’s going to be very very hard to overcome with just capital. But if you’re like 1% penetration, all these startups are out there, you know, trying to find a business model. Um, that’s very easy for PDD to catch up on just by spending money. And they can spend that money more efficiently than if they entered first because they learned from all the mistakes of others. Um, and so what’s interesting about PDD also is that they started in what I would call like a gen, they’re a gen two company in China. So gen one would be like your 10 cents, bu Alibabas, right? Started in a desktop world. PDD really started about 10 years ago um in a mobile world in where WeChat was already starting to proliferate and social messaging was already starting to proliferate. Then you know they they got a investment from Tencent that really helped them to um jumpstart the traffic uh basically Tencent fed them a lot of traffic into the PDD app. Um but basically they entered by attacking a market that none of the incumbents had actually focused on which is lower tier cities and households that don’t make as much money. So in rural parts of you know Shanghai in 2018 GDP per capita was around $20,000 right you’re starting to reach like you know Korea levels at that point. Um, but you know, if you go to like tier three and more rural parts of China, GDP per capita is 5,000. And so it’s a 4x difference, right? The type of platforms that people are attracted to in Shanghai versus like lower tier cities, very very different. Um, in addition to um, like I said, the same things around, you know, first experience with mobile shopping or online commerce, lower-end smartphones, less entertainment options, so you use shopping as entertainment essentially an infinite scroll. and PDD really attacked the 600 million people that were living in like what I would call like it’s almost like a different country, right, than tier one cities. It’s a completely different country and different culture um in different like purchasing power. And so PDD really catered to this segment of the market um that no one else was present in. And because it’s very hard to, you know, ship products within 2 days to the countryside of China, they went after categories where and had AOBS where people didn’t care to get products in two days, right? They were okay with waiting a week or two weeks for these products. Um, on top of that, PDD had a model where um, you know, because these households have lower discretionary income, they really care about price. Well, how do you make price more efficient? By going direct to the factory. And if you you know China is basically the manufacturer for the entire world. There’s a lot of factories in the country and a lot of these factories do not run at full capacity. And so PDD came up with a model of let’s kind of almost be like Costco like aggregate demand in a sense. So what they do is what they it’s called C to like consumer to manufacturer. So on the app if you actually go on there it’s almost like an infinite scroll what I would call like almost like a sushi conveyor belt. A item is not going to be on there forever. it’s going to be on there for maybe like couple days, a week, two weeks, etc. until they run out of inventory and then if it’s gone, it’s gone forever, right? And so encourages you to order first. And they started off with a group buying model also, which was you had to get like say a hundred people to buy together before you know the the order um can be made essentially by the factory. And so they would aggregate all these orders and then present this bulk order to the factory which would then make it on the spot, right? Um, and because they were bringing demand to the factory, number one, factories knew exactly how much quantity they need to make. So there’s no risk of inventory risk, right? There’s no risk of like making too much and having to mark down. Number two, some of these factories might be operating at like 50% capacity. And so if you’re operating at 50% capacity, um you know, you’re going to be willing to accept a price that is higher than the average variable cost of producing that good, but probably lower than average total cost, right? Like factoring depreciation, all of that. And so they were able to kind of, you know, cut the middleman and also get a lower price for that reason, catering to more rural consumers that were more price sensitive and didn’t care about shipping times. That was the real wedge here. Yeah, it’s interesting because I almost want to make the claim that you can’t learn anything from, you know, this situation where we want to look at different examples and try to extrapolate out broader lessons. And I don’t know what the broader lesson here is because there’s a lot of idiosyncratic things at play. You have a different sort of commerce model that you mentioned, community group buying, which means you need to get, you know, a hundred sometimes a thousand people to purchase something in order for the deal to become valid. That business model existed before though. That’s what Groupon essentially was. And that business model did not work in the United States or elsewhere. You had other sort of e-commerce sites in the past where they would sell directly to consumer from manufacturers. That’s kind of what Overstock was in a way. So all of these things kind of existed before, but it just was the right mix, not the right time or not the right, you know, execution where uh you did have now a player who was able to put community group buying together. Another key part of that was the 10-centent partnership you mentioned where if uh Alibaba, they did try to copy with their own community group buying app, but funny thing, if everyone’s on WeChat or Wayan and you try to share a link for Alibaba, it’s going to blow up the link and it’s not going to be clickable. And so you won’t be able to actually effectively access the consumers. And that’s like a very one-off kind of idiosyncratic thing for that market. Whereas, you know, the same game played again where everyone was on WhatsApp or iMessage. I don’t know if you would have seen the same result in in the same time period. I also know um you know you’re kind of talking about the the different sort of purchasing habits. I know a lot of the initial sort of sales on Pindo was fruit where it would you know those manufacturers would actually be farms and they were now able to reach out to consumers for the first time ever and sell directly. I don’t know that we really have something um similar to that in in the US or in some other countries. And part of that too, it goes back to also now the logistics network that you’re talking about. Uh is it more expensive or cheaper to ship something in these different markets? And um China in specific, if you’re thinking about um an e-commerce com company coming up late, uh there was no e-commerce company that had kind of total control over over logistics, right? Because Alibaba, who at the time was the most dominant, they created something called SI Now, which actually helped enable all of these thirdparty logistics companies to be on a unified platform and made a lot of them stronger. But it also meant that they could go to competitors and take sales from other people because JD.com at the time who did try to do the the full chain e-commerce logistics um uh sort of play, they weren’t anywhere near as big. And so that meant that Pendo had existing logistics infrastructure could sort of piggy back off of. And so all this leads me to wonder like what what is the real lesson here for investors? I I guess you could say just because you’re dominant, if you come up with a new sort of mousetrap, you could still um you know displace an existing incumbent because the second act of the story is that they now do a lot more of kind of the traditional e-commerce stuff. You don’t need to do the group buying anymore. You could just buy a lot of stuff and it’s kind of a normal e-commerce experience as well if that’s what you want. So what what are what lessons do we take away here? Yeah, I I mean I guess number one is that they actually didn’t directly go against the incumbents in the early days, right? Like I said, they went after like more rural areas of China where Alibaba or definitely JD was not serving them. And so they went after a completely brand new set of consumers. And you know through circumstance of history is at this point in time these users were also logging on to WeChat for the first time and sharing links and you know um sharing cool things that they find online and a big part of that is sharing deals that they found on Pindoo and so that virality definitely helped jumpst start that business and you couldn’t replicate that today absolutely not because you don’t have hundreds of millions of people experiencing you know the mobile phone and mobile internet for the first time ever right and getting excited about it. Um so no absolutely I I would say like but they did do something smart which is going after a market that no one else did and kind of have that viral effect which allowed them to gain to a large enough scale nowadays to now start attacking the incumbents and I would say they really just started going after the the incumbents a couple years ago. Yeah. Yeah. So it’s also a little bit of disruption theory, right? Where you start at the low end, it’s a unprofitable market for others. If you can make it work, then it’s a lot easier for you to move up market into other adjacenties. Yeah. And a lot of venture capitalists talk about how they missed Pingdoo precisely because they lived in geographies where like they didn’t know anyone who used it. They didn’t use it personally. Like it’s not an app designed for like a Shanghai resident, right? or a Shenzhen resident like um which is where most venture capitalists sit, right? Um and so a lot of people kind of yeah downplayed that business and didn’t give it enough credit in the early days for that reason too. Okay. So why why’ you decide to exit that position? Yeah. Well, look, the business has done extremely well. We bought it with for with a very specific uh thesis which is we thought we bought this in 2022 when the world hated anything China tech. um a lot of western funds funds were forced to divest you know Chinese holdings and what we saw was a business that was highly cash flow positive growing at the time 65% year-over-year um and they had substantial cash on their books and we thought that you know within a couple years they would have more cash on its balance sheet than the entire market cap by the way we bought this around like 3540 billion market cap today they have over $50 billion of raw cash sitting on their balance sheet right So that’s a very very different thesis right and we bought it at call like 10 times price to free cash flow when we thought free cash flow would just explode because if you looked at sellside consensus sellside was basically modeling like 7 billion of profits like flatline without any growth attributed to it and we were like okay the street obviously doesn’t know what’s going to happen to this because one way or the other it’s going to go up or it’s going to go down tremendously right depending on what you believe um it’s not going to remain flat so we bought it with that thesis in mind we thought that community group buying would soon become profitable And you know they’re they’re generally break even at this point in time and they are the de facto winners at this point because all the other competitors have left. And we said this is actually a really interesting business that um we think is going to be highly cash flow positive and even though the management team doesn’t give much disclosure like you can do enough work to understand this business is real um and that there is a huge segment of part of the population that finds value in it and it’s at a cheap enough price that it’s almost like a net at that point. So that’s why we bought it. um you know our stock we bought around like 40 bucks and you know stock has fluctuated in the last year between call it like uh you know 100 to 150 and so our thesis has changed there and we’ve just found better opportunities elsewhere. And speaking of those better opportunities if we could just close the loop now on kind of C Limited. Uh I know that’s one of your larger holdings still currently. They have about a $50 billion market cap right now. If you’re looking at just, you know, let’s say gross profits, they have 10 billion roughly speaking in LTM gross profits. And that is up an incredible uh almost 20x from 2019 where they have 600 million in gross profit. So it’s been growing a lot. Uh you know, revenue is growing 36%. Right now operating margins are about 9%. So what are your kind of expectations with C? Yeah. Um look, I I think C is really interesting because let’s just start with the downside, right? Because even though we invest in growth companies, I do I am a value investor at heart. So we do need to watch the downside. Uh and what it is is basically C is essentially trading at replacement value today. Um essentially they have called it 12 billion of cash in investments. They have a line of business called Coney or money which is essentially a lending arm, a credit arm uh lending to consumers and also some merchants. They have you know call it about $8 billion in that business. They have Garina the gaming business that’s doing about 1.8 billion of uh IBIDA as well. Um if you were to just liquidate all these businesses right it just don’t give any credit ex take out whatever cash you can you can take out your 12 billion you can take out your eight from the lending business and just assume that you know that business line no longer runs. Um you have a gaming business that does 1.8. Uh you have crafting or PUBG out there in Korea trading at like six times. Let’s just put a 5x multiple on it. Very similar game right? uh battle royale, mobile based, etc. Um, you know, you’re you’re really looking at an implied value of shopppee at like 18 to 20 billion dollars. And this is a business that is doing it did 127 billion of GMV last year and growing GMV 25% plus. Uh they’re going to do north of 160 this year and so you’re looking at call it you know 1/8 of GMV on the implied value of shop E. Now the question really the market is having and why the stock stock has gone down so much is no one has high confidence what terminal margins looks like on this business and they haven’t done a you know they’ve kind of shot themselves in the foot as well by swinging investors around the last couple years. So you know they were highly uh negative margins going into you know 2022 they had to get profitable really quickly profits then eventually went up to call it 1.2 to a percent of IBIDA as a percent of GMV and then they said no we’re going to reinvest and then they came back and you know got profitable again and now they’re again in a reinvestment cycle. So investors hate being swung swung around because they don’t have like linear linearity to like where ultimate margins will get to. Um but look if you look at the most competitive e-commerce market in the world which is China you have four large players there every single company there is making either around two or above two uh% IBIDA as a percent of GMV and this is with four very large players all in a blood bath fighting each other on the e-commerce segment and so I don’t think you know people have this mis perception that you know you have to be like the the actto monopoly in order to squeeze out margins on an e-commerce business like this. I don’t think that’s actually the case. I think what needs to happen is each competitor needs to be rational and profit seeking and kind of be willing to like stay within their lanes and kind of specialize in something different. And so what C is doing right now is they are again in a investment cycle. They’re guiding to about 50 bips of IBIDA as a percent of GMV. But like I said, even in the most competitive market out there, you’re looking at like two plus and C on a medium-term margin is guiding to two to 3% as a percentage of GMV. So you can take management’s word for it. You can look at China, the most competitive market. There is never a case in the world where um countries have gotten richer and yet e-commerce penetration has gone down. And so you have a very strong tailwind behind you as well uh you know just globally. Um, and so the question is when does margins go from 50 bips to 2%, right? How long does that take and when are they satisfied with uh being done reinvesting into this business or not as aggressively as they currently are? I think that’s just a question that the market is grappling and we can’t answer that for sure either. But we know that number one there’s very little downside at these evaluations. It was a similar case in 2020 late 23 when they were also uh fighting Tokipedia and Tik Tok at at that time and they went into a reinvestment cycle. Stock went down about 60%. And then soon as they stopped reinvesting and said we’re going to be a little bit more profit maximizing stock went up 5x, right? Um and so that just shows you the volatility in in this name and what the street perceives. But look, we think that eventually they’re going to hit two and you’re going to see uh those profits flow to the company and you’re see going to see the stock rerate materially. And it’s interesting. It’s a little similar to what’s going on at Marcato Libre right now. They kind of also are going through in a reinvestment cycle. Um I’m just kind of curious, not that you know Brazil is necessarily critical to a C limited thesis, but do you have any thoughts on shopppee strategy in Brazil relative to Marcato Libre? And if you could maybe just give two sentences kind of describing the situation for those that don’t know. Yeah. Um I mean the situation is that C limited uh back in 2019 2020 started uh seeing that the business model was working in Southeast Asia and started exploring other countries to launch in and their first market was Brazil. What’s interesting about Brazil is number one there’s a much better call it like credit uh infrastructure there so access to credit. Number two GDP per capita are much higher call it like 10,000 12,000 uh dollars per person. Um and then number three is Marcato Libre has primed the uh consumer to shop online if that makes sense right like people at least understand what shopping online and e-commerce is even if they have never tried it before. The difference between that is, you know, you have to understand history and how these companies developed and how it kind of pigeon holed them to the business model that they have today, which is, you know, several years ago, we studied Marcato and realized that Marcato investors love Marcato because it never really had competitors. It was a monopoly within the Brazilian or LAMP uh e-commerce industry. And why did they never have competitors? Because these guys were launched, you know, 25 years ago, right after tech bubble 1.0 and there were very very few startups that were funded during that 10-year period from call it 2022 to um uh sorry 2002 to you know 2012, right? And so Marcato was able to grow when it was still an infant in you know a child in without any competition at all. But they also didn’t have access to capital, which meant they had to be self-sufficient and profitable very very quickly. Well, how do you get profitable quickly in a country like Brazil? You go after the richer households, right? Those who can spend $50 like USD on a order, right? Not very many households in Brazil can spend that much on an order multiple times a month. So, you go after the richer households. What do the richer households care about? Brands, quality, service, logistics, quick shipping, right? And so Marcato then had to build out a because their logistics is really terrible in Brazil. And so they had to build their own and spend a lot of capital on that. But to justify that spend, they also need to keep serving the top 1% or top 5% of households, right? Because the AOVs are there and it’s how you get profitable. What shopppee realized and why they entered was they realized this was a chicken or egg problem. You know, Marcato had never faced competition um because they kind of captured that top sliver of society. um and the upper um income households. Um but how do you serve call it the bottom 95% profitably? You need order density, right? You need to make your money almost like on volume. You need to like going into rural Brazil, shipping times are going to be longer and it’s going to cost you more to ship that package too. And that package is probably going to be lower order value, right? It’s not going to be $50, it might be $10. And so you need to be able to justify that spend. Well, how do you do that is you need to get that person plus their neighbor plus their neighbor plus like a hundred other neighbor to all order from this app so that you know you’re you can justify building a logistics route to that neighborhood. Um which meant you had to spend a lot on not just logistics but marketing and consumer customer acquisition, right? And so they basically said we need to spend $4 billion here. Well, how many startups have $4 billion to jumpstart that chicken or egg problem? Not very many. The only real companies are like Amazon, which Amazon could have done it, but they just never focused on it. And I think they have a very different business model, so it wasn’t necessarily in their sweet spot of what they do. And then Shopee, which has done this in Southeast Asia already, and they had access to $4 billion. So let’s say, you know, let’s spend this and jumpstart this chicken and egg problem. And the TAM of that 95% is going to be, you know, higher than than what Marcato does. Um, so they came it from that perspective. And you know 5 years ago kind of everyone rode off this business and said like there’s no way they can disrupt Marcato. But now Shopppee is the second largest owner of like warehouse space right after Marcato. They just signed the largest lease in Brazil for the largest warehouse like ever built. It’s like even not even fully built yet. Um in addition to they ship more packages per day than Marcato through their own logistics. 70% of all packages are so uh fulfilled internally by shopppee express. And so they kind of proved like the market had this con concept that Marcato’s logistics network was really like their holy grail moat and shopppee proved that within 5 years and enough money that moat really isn’t that hard to overcome and replicate. Right. I would even say just having good logistics now is like table stakes if you wanted to be a e-commerce player. Yeah. I I know the push back of that would be that they’re really only have quick shipping in like Rio de Janeiro, a couple other large cities and if you go outside of the large city centers then you’re getting you know 5day oneweek shipping times and that’s a much harder problem to solve. Um just cuz I I do want to touch on some other investments. Uh but this was kind of interesting just kind of getting that juxosition and on this channel we talk more about kind of what I would say as my rebuttal to that um at least from Maricado Libre’s perspective. But is there any other final thoughts you want to say on Melly or C Limited before uh we maybe touch on a different one? No, I I I well, I would just say like probably the biggest misconception out there is I think both Marcato and C will do just fine, right? I I think they’re going to carve out their segments of like who their primary customers are. Like I said, Marcato will probably take like the top 10%, top 20% of households and C will try to serve the other 80%. Right? and the business models for each are going to be very different and what consumers care about are very different because income levels are different and you know priorities are different. Um but I think they can both coexist and make money. It doesn’t have to be like one or the other. Yeah. No, it’s interesting though because Marcato Libre very explicitly said, you know, we don’t want to lose the lower end and they just, you know, knock down their free shipping thresholds and they’re um doing a lot to kind of address shopppee to not seed that market. So, it’ll be interesting to see what happens there. Um, maybe kind of switching gears, I I know you’re also an investor in AppLoving. That is a company that has always kind of bewildered me. I’ve kind of understand a little bit about adtech. I could kind of understand why it’s working. I don’t, to be honest, understand um why it’s gone as well as things have gone for them. I think they probably were a beneficiary of AT, but if you could kind of just give us a little overview of the Apploving business and kind of your investment thesis there. Yeah. So we invested in AppLovven in early 22 in the spring of

22. You know the stock had IPOed the year before. It had gone up to north of 100 I believe like 120 and then was in a drastic decline along with the rest of the market in 22. Um the reason we got interested was at the time in 2022 the most of the market still viewed this business as like a mobile gaming business like a mobile studio right that just makes free-to-play games. I think at if I remember correctly it was 70% of revenues at the time but 30% of revenues was this adtech network that they were building that was growing triple digits like 100% plus and I looked at that I was like what the heck is going on right because the stock at the time was also trading pretty cheaply like around 10 times free cash flow um and so when you study that business more you realized this is actually not a mobile gaming business the core business is actually adtech network which is a much better business than mobile games. Um because if you understand mobile games, you might make a $100 and maybe your profits are like call it $40, but that $40 is all going to get reinvested right back into, you know, the uh the adtech network to try to acquire more users and keep spinning the wheel, right? Um and what gave me background on this business just really quickly is that we had studied the entire mobile gaming ecosystem back in 2018. So the full stack right from any everywhere from studios to you know ad tech networks to gaming engines to you know the supportive players all around it and you know maybe some of the outsourced um you know technical staff in Eastern Europe and etc. We studied all of these businesses and came to a conclusion what do you want to own in here? You want to own either the adtech network which is essentially takes a rake every single time the money spins in this ecosystem or you want to own the gaming engine. Um, now obviously Unity owned the gaming engine and so, you know, we we always kept that in the back of our heads. Well, Apploven IPOs a couple years later and we see the adtech network, so we’re already familiar with that business. Um, and what’s interesting is that they basically spent a billion dollars on games in 2018 on on gaming studios to acquire all these gaming studios which provided them with 200 million players uh that were using these games every single day. And what’s important is to your point about AT, right? When AT happened and Apple kind of shut off all the uh identification for, you know, iPhone users andif I believe the stat was 51% of users opted out of sharing data, right, with third party apps. Well, holy crap, you just lost a huge portion of the population that you no longer have a signal on and can no longer target for ads. Um, AppLoving had the wedge. They had a unique data source that no other ad network had, which was these 200 million players that they had acquired several years ago. And these players, the reason Apple bought them was they kind of saw the writing on the wall that you know maybe this would happen and Apple would um you know enact this and they really needed to own the data. All of these usage metrics kind of fed into their ad model. So they were able to target much better. And if you have 200 million, you know, players and there’s like a billion plus players in the world, you can kind of extrapolate that, right? And your model will be able to target much better than all the other ad networks out there. So that was their advantage as well, you know, after at happened and why that ade network did so well. And the thing is that this entire ecosystem, mobile gaming, I almost view, like I said, almost like a circular economy. It’s almost like a casino. you know, you make some winnings and you plow it right back in the slot machine to try to win again, right? That’s how most mobile gaming studios work. But in the middle sits the adtech network, which is Apploving, and they take instead of taking, you know, a couple percent edge like a casino does, they take 25 to 30% rake every single time that wheel spins. Um, and so they basically suck out a lot of the profits and the profits acrew to them in the mobile gaming ecosystem. What’s unique about mobile gaming is that mobile gaming is actually the majority of all app uh revenues, right? You think about the app economy, it’s about 120 billion. Mobile gaming is north of 60 billion of that. And app, you know, is is you know, call it they’re serving about 15 billion of that today on the demand side. Um the other thing that gave them advantage is that this is almost like a blackbox algorithm, right? And so that’s what gives people a lot of uncomfort because they can’t actually vet you know what makes this special. Um but you know with any algorithm the more data you feed the more accurate the model becomes and the better the targeting becomes. And what they did right was number one they bought the mobile game studios. So they knew the demand side. They had demand side data that no one else had. And then they bought Mopub for a billion dollars. Mopub was one of the largest mediation platforms. So almost like a sellside broker uh representing ad slots inside of games. So not only did they own the demand side or the buyer broker side of things uh they with like 30% market share today, they had 70% market share on the seller side of things. So they had full stack um visibility into the entire value chain and like kind of like how much inventory slots were worth um that other ad networks just didn’t have access to, right? and so they can price much better than than competitors. That was their wedge.

Yeah. So, it’s really interesting because I I feel like there’s a lot of different players that were trying to kind of build this ad marketplace where you could get both the demand side, the supply side. And you took the opinion that uh Apploven would be the one that would be able to do that. And as soon as you know someone kind of gets a foothold in there, then there is a lot of inertia that brings a lot more uh game developers to their platform, a lot more advertisers there. So you you do kind of have that as a benefit from them. But my understanding now is that kind of to get this next leg of growth, it’s going to be more dependent on them winning a lot of different advertisers that they traditionally haven’t been that big with a lot of different um e-commerce advertisers. and maybe they’re particularly strong advertising with mobile games, but you know, is someone going to be in a video game app and and get a ad for a haird dryer and go ahead and just buy that right then. So, do you see any limits to kind of this model? Because, you know, I I believe it’s right now around $160 billion valuation, maybe has around $3.3 billion in earnings. So, you still do need a lot more growth um in order to kind of uh rationalize an investment here. Yeah, 100%. It’s a very different thesis at this price than when we originally bought it, right? We started buying this around 27 bucks, you know, double down when it was around 13 bucks and the RSUs were struck like three to four times, you know, the current stock price that kind of was a good signal. Um, but you know, at that point, you know, no one was pricing in the adtech network and also it was trading at three times cash flow at the bottom. And so, you know, cash flow has gone up uh tremendously along with multiples and that’s kind of created the the um stock price rise in the last couple years. From here on out, I think you’re right. I think, you know, they’re pretty well entrenched in the gaming side of things. Um it’s very hard to gain incremental market share or find like new games to kind of serve. Um it’s really going to be about conversion at this point. Adam at the uh at one of the sellside conferences a couple months ago gave the uh stat that their conversion rate is about like 1.3%. So like 99% of ads that they serve actually are are not monetized and they think just through self-improvement of the model they can get to 5%. And so you know that’s like a 4x increase right in just conversion alone but obviously they’re also going to target better and so that they can um extract more margin out of that. So instead of like a take rate being 30%, maybe they can make like a 40% take rate or 50% take rate as their model gets better. And so revenue should grow even faster than 4x. Um, and so you know that’s really what you’re playing for at this point in time. And what drives your conversion from like 1.3 to 5 is diversity of ads, right? Let’s say you’re playing Candy Crush right now. You’re happy with the game um and you’re not looking for a new game to play. Well, if Apple serves you another gaming ad, you know, it’s a waste of time and space, right? You’re you’re not going to click on it. You’re not going to download the game. But if they serve you like an e-commerce ad, you know, maybe it’s like a Quinc shirt or something, right? You’re looking for that anyways. And so, you might actually click it and you’re conver and so conversion rates go up because that diversity of ads. And so, that’s really why they’re trying to get into e-commerce to just increase that conversion rate. Um, and I think uh, yeah, what’s interesting about them is that again, this is a the reason why investors are so uncomfortable is that this is a blackbox algorithm. I don’t think Adam can even tell you what the algorithm does or what it’s going to predict, right? Um, but it’s the way I relate it to is like it’s like Citadel Securities or like Two Sigma or like um, you know, Renaissance Technologies. These are, you know, automated market makers with also blackbox algorithm that takes a spread on making a market. It’s just these these other players make a market in the financial markets and Apple makes a market in the ad market, right? Um but the difference is that instead of taking a couple basis point on each trade, you’re taking, you know, 30%. Right? Um so it’s a much different uh it’s a much more attractive business for that reason. Um but look if I could invest in Renaissance Technologies I absolutely would would even though I have no idea what the algorithm is doing right you can look at the outputs you can see that um either they’re making more money or apploving you know their suppliers or call the the biders of these ads are spending more and more money on app loving and obviously they’re getting ROI you know they’re not dumb they can they these are performance ads they get instant feedback within seconds whether this ad is working or not and so the more the higher their ROI the more they’re going to spend Right. And so it shows that something is working as long as the uh both sides of that network are growing. Yeah. And I know you just said it, but I just want to confirm that. So most of their advertisers on the platform are return on ad spend uh driven, right? It’s not brand ads. No. No. There’s like no brand ads on on here. Every single thing is performance-based. And so it’s like instant feedback. Interesting. Interesting. So what do you think are the biggest risks then to this business model? Yeah, I mean look, I think it’s just valuation honestly. Um I think gaming itself, the way that we see it is like gaming itself is probably worth like status quo probably like 3 to 400 uh bucks a share. Um everything on top of that is going to be a call option on e-commerce. Um and so the question right now is e-commerce is starting to work. We’re starting to see like you know data that shows that that is actually starting to accelerate. Maybe not as quickly as some investors had hoped, but it is accelerating and start people are starting to spend more. And we’re even hearing that, you know, the cost of the ads are going up and starting to price out, you know, some of the lower tier games um because, you know, these e-commerce advertisers are able to spend more, right? Um so it shows that the mix is starting to change and e-commerce is starting to become a meaningful part of this business. Um but it’s still a call option, right? I think downside is protected because literally it would be very hard to disrupt Apploven from the gaming segment at this point in time. You know, no one else has 70% market share on the supply side of the business and you know, call it 30% market share on the demand side, which is right behind Facebook and Google. Um, so I think gaming is well entrenched and they’re probably going to make 10 billion on just gaming alone in a couple years and then all the upside from here is call it e-commerce and that’s almost like a very wide range of outcomes. Yeah, I I don’t know that Apple’s going to do this, but if Apple wanted this business, couldn’t they just take it? I’m not so sure. Yeah. Um I I think Apploven definitely has a bit more um entrenchment with with their suppliers and has enough data out there uh that I think they’ll be able to put up a good fight versus Apple. But Apple would be able to say it’s all first party data to us. we can open up, you know, more ad slots across all these different mobile apps. Yeah. Well, there there always is that risk and, you know, Apple was going to crack down on fingerprinting a couple years ago. We haven’t heard much about that. And it’s because they realize if they crack down on it, they kind of destroy, you know, basically 60% of what makes up the app store, right? The app ecosystem is essentially a mobile gaming ecosystem because 60% of revenues. Um, and if you get rid of all this stuff, like, yeah, you can try to take it for yourselves and take the revenue for yourselves, but you also destroy the ecosystem and the ecosystem collapses. So, I’m not sure it’s in their best interest to actually disrupt it. Yeah. No, it’s interesting, too, because Facebook used to have a business like this that they decided to get rid of basically and they they don’t have it anymore because they just figured the return on ad spend was always better on their platforms. But I do wonder if they ever, you know, decide to get back into it or something like that. But I you know usually you know by this point if a business has been there and kind of got this entrenched and got this network effects going it’s a much harder thing to disrupt. It’s interesting though because you know I know Twitter had this Facebook had this kind of mobile ad publishing business and none of them have been that successful with it. So I for me at least it was a little surprising seeing you know apploven just degree of success with it. Sure. Yeah. I I 100% agree like it’s a risk right if any of these large tech companies want to and you know there’s been more noise out there of Facebook you know starting to take another look at getting into this business so absolutely it can create like disruption and noise in the industry and it’s probably not going to be pretty for a couple quarters um so yeah absolutely that’s that’s definitely a tail risk here yeah but all investments have risk um thank you for for this discussion I really enjoyed Uh where can people learn more about you or uh follow you? Yeah. Um look, a lot of our materials are available on our website uh hayden capital.com. We believe in sharing publicly our research and you know always welcome feedback uh from other smart investors on these names and I do post occasionally on uh X as well and so you can find me under Hayden Capital there also. Yeah and I I recommend uh Fred’s investor letters as well. I really like that he does talk a lot about his research, you know, for the C Limited uh research. He’s going into the unit economics and it’s actually really interesting to read. It’s not this just like highlevel, you know, oh, it’s e-commerce company’s secular advantage. No, it’s like here’s the unit economics like we’ve been able to figure out the on the ground research. So, I always learn something from reading them. Uh, so I really do like those. I think everyone should read them as well. And thank you, Fred, for joining the podcast. I really enjoyed this. Yeah, absolutely. Thank you, Drew. Appreciate it.