Investment Pitches

Pitch Summary:
A sizable underweight in Apple also hurt, as the stock advanced about 7% this quarter. The stock was bolstered by strong results for the quarter ending September 27. Revenue was up 8%, while earnings per share rose 13%, both surpassing consensus expectations, buoyed by robust demand for the new iPhone 17 lineup, as well as record sales in Apple's services segment. In his October 30 update, CEO Tim Cook projected growth of 10% to 12% for the holiday-season quarter. We continued to see better opportunities elsewhere.

BSD Analysis:
Apple enters 2026 coming off a record-breaking fiscal Q1 (ended Dec 2025), reporting $143.8 billion in revenue, a 16% year-over-year increase. The company's installed base has officially crossed 2.5 billion active devices, a milestone that is driving record performance in its Services segment, which grew 14%. For 2026, the primary catalyst remains the integration of advanced AI features across the iPhone and Mac lineup, which CFO Kevan Parekh notes is generating near-all-time high operating cash flows ($54 billion in the December quarter). Management has declared a $0.26 dividend payable in mid-February, signaling continued confidence in its capital return program.

Pitch Summary:
Overweighting Paycom Software detracted most. The company offers a cloud-based human resources platform targeted to U.S. small and mid-sized companies. The stock declined partly due to broader weakness in software stocks amid concern that AI might usurp much of the functionality of software applications at a lower cost. Additionally, the company's Q3 financial results were mixed. While revenue grew by 9% year over year, earnings growth decelerated amid weaker operating margins. Several analyst downgrades also weighed on the shares. We reduced this position but maintained an overweight, given our favorable long-term view of the company.

BSD Analysis:
Paycom sells payroll and HR software the old-fashioned way: one platform, one database, no excuses. Customers adopt Paycom because ripping out payroll systems is organizational pain. Growth has slowed as the company pushed pricing and efficiency harder. Competition from larger suites is real, but Paycom’s simplicity remains its edge. Margins are elite because sales efficiency is high. Execution discipline matters more now than expansion. This is not a hype SaaS story. It’s a focused HR system monetizing inertia. Paycom works if retention keeps beating expectations.

Pitch Summary:
An out-of-benchmark stake in South Korea-headquartered SK Hynix was also among the fund's top relative contributors. The stock gained roughly 83% the past three months, rallying amid strong demand for its digital memory solutions. In a third-quarter conference call with analysts, the company said that all of its memory products – including DRAM, NAND and high-bandwidth memory chips – were sold out through 2026. To address the shortage, management said it would increase capital spending to meet demand, prioritizing technology migration and infrastructure build-out. We increased this position in view of the extraordinarily robust demand for the firm's products.

BSD Analysis:
SK hynix is one of the clearest leverage points to the AI buildout through its dominance in high-bandwidth memory. HBM is no longer optional — advanced accelerators don’t function without it. Supply is tight, qualification barriers are brutal, and hynix sits in pole position. Memory remains cyclical, but this cycle is structurally different due to AI demand. Capital intensity magnifies both upside and risk. Technology leadership matters more now than ever, and hynix has it. Volatility is guaranteed. This is not a defensive semiconductor stock. It’s torque backed by unavoidable demand.

Pitch Summary:
Overweight exposure to Alphabet contributed most at the stock level. The shares rose about 29% the past three months, as the parent of the Google search engine continued to execute on its artificial intelligence strategy while producing solid financial results across its other businesses. Investors were especially positive on the firm's fast-growing cloud-computing division, while the advertising and search segments also showed strength. In November, Google debuted an updated version of its AI model, Gemini, that company executives said represented a "massive jump" in reasoning and coding ability. We added a bit to this position, given the strong fundamental backdrop.

BSD Analysis:
Alphabet remains one of the most powerful cash-flow engines ever built, even as disruption narratives refuse to die. Search is still default behavior, and AI enhances monetization rather than eliminating it. YouTube has quietly become a global media platform with multiple revenue levers. Google Cloud profitability resets the earnings profile from optionality to substance. Regulatory pressure is constant, but user behavior hasn’t meaningfully changed. Capital discipline has improved through buybacks and cost control. The balance sheet provides unmatched AI investment flexibility. This is not a melting ice cube. It’s a dominant tollbooth adapting in real time.

Pitch Summary:
Finally, Red Rock Resorts, Inc., a casino owner and operator focused on the Las Vegas Locals market, spent over $800 million developing a new elite property, Durango, for this market. It successfully completed Durango and is now generating robust returns alongside strengthening performance across six core Las Vegas Locals casinos. The company continues to report strong visitation and robust slot and table game play, along with improving activity from uncarded and non-rewards customers. The company’s initiative of opening its Durango property is generating robust returns, and performance across the company’s six core casinos has strengthened as the Las Vegas Locals market absorbs Durango’s extra supply. Given the strength of the market, management continues to ramp up capital investment, which we believe should support ongoing revenue and EBITDA growth over the next several years. The stock appreciated 39.4% in 2025.

BSD Analysis:
Red Rock Resorts is doubling down on the Las Vegas locals market with a $385 million expansion of its Durango Casino & Resort starting in January 2026. The 18-month project will add nearly 400 slot machines, a luxury cinema, and a 36-lane bowling alley to capture the high-growth demographic of southwest Las Vegas. For 2026, the company is balancing this heavy capital spend with expanded share repurchases and higher dividends, reflecting confidence in sustained regional earnings. Red Rock’s strategy focuses on suburban gaming markets that are less susceptible to the tourism fluctuations affecting the Strip. With more than 6,000 new households expected within a three-mile radius of Durango, the company is well-positioned to maintain its record net revenue trajectory.

Pitch Summary:
Veterinary diagnostics leader IDEXX Laboratories, Inc. spent years developing new tests. One was released in 2025, and another is expected to come to market in 2026. Utilization of new tests has exceeded expectations. The company contributed to performance after again reporting better-than-expected financial results. We believe IDEXX’s competitive trends are outstanding, and we expect new proprietary innovations, such as InVue, MultiCue, and CancerDX to be meaningful contributors to growth in the years ahead. We also see increasing evidence that long-term secular trends around pet ownership and pet care spending have structurally accelerated, which should help support IDEXX’s long-term growth rate. The stock appreciated 63.6% in 2025.

BSD Analysis:
IDEXX issued a bullish initial outlook for 2026, projecting revenue between $4.63 billion and $4.72 billion (up 7%–9% organic). The growth is led by CAG Diagnostics recurring revenue, which is expected to rise 8%–10% organically, fueled by diagnostic innovation and a 4% net price improvement. However, management anticipates a decline in instrument revenue as it laps the record placement cycle of the IDEXX InVue Dx. 2026 EPS guidance is set at $14.29–$14.80, reflecting a targeted 40–90 basis point operating margin expansion. Despite pressure on clinical visits (projected -2% for 2026), IDEXX remains a "Moderate Buy" due to its aggressive share repurchases and dominant 24.6% net margin.

Pitch Summary:
Brokerage firm The Charles Schwab Corporation has embarked on a multi-year program to improve funding costs. Net new asset trends have strengthened as the company completes the multi-stage migration of TD Ameritrade accounts to the Schwab platform. Reflecting these positive developments, full-year guidance was raised for revenue, net interest margin, and earnings per share. After several years of downward earnings revisions, investors are rewarding Schwab’s improving fundamentals and upward estimates as the company returns to its normal double-digit earnings growth trajectory. We believe Schwab has a dominant position in retail brokerage and an ability to drive earnings growth through both organic expansion in assets under management and improved funding efficiency. The stock increased 36.6% in 2025.

BSD Analysis:
Charles Schwab is in a "post-balance-sheet reset" phase for 2026, with analysts projecting a 16% annualized return as funding costs normalize. The company is modeling 8.4% revenue growth and an expansion of operating margins toward 53% by 2028. Execution momentum is supported by record client engagement and the stabilization of net interest revenue as rate headwinds fade. For 2026, the mid-case scenario assumes revenue growth of 6.5% and operating margins improving toward 39.4%. While the stock trades at a lower P/E than its historical average, its ability to sustain asset gathering in a moderating market remains the primary debate for investors.

Pitch Summary:
FactSet, a leading provider of investment management tools, declined due to a combination of industry-wide concerns about AI and cautious commentary from several financial data and software peers. We maintain conviction in FactSet due to the large addressable market, sticky customer base (95%-plus retention rates), consistent execution on both new product development and financial results, and robust free cash flow generation. We believe that new CEO Sanoke Viswanathan is a highly capable leader who is focused on reaccelerating growth and driving a stronger sense of urgency across the organization. A key part of Sanoke’s plan is to enhance the company’s product development efforts with areas of emphasis on completing the portfolio lifecycle, embedding AI functionality across the product suite, deep sector data, real-time data, and front-office capabilities like order/execution management.

BSD Analysis:
FactSet enters 2026 as a "Dividend Aristocrat" in the making, recently reporting a quarterly earnings beat with $4.51 EPSon revenues of $607.6 million. The company has set its FY 2026 guidance at $16.90–$17.60 EPS, supported by a newly authorized $600 million share buyback. While revenue growth is forecast at a modest 5% per annum, FactSet maintains an elite 30.5% return on equity and a net margin of 25.4%. Management is prioritizing the integration of AI-powered fixed income data and the rollout of production-grade Model Context Protocol (MCP) servers. Despite a consensus "Hold" rating due to valuation concerns, the stock remains a resilient defensive play in the capital markets segment.

Pitch Summary:
Gartner, a provider of syndicated research, declined following decelerating contract value growth. We attribute most of the slowdown in CV growth to cost cutting in the U.S. public sector, which is around 5% of revenue. Industries that are dependent on public sector funding, such as education, also saw a more challenging business environment. The significant reduction in contract renewals is unsustainable, in our opinion. We believe many of these contracts will be reinstituted in the coming quarters and years. The market is also concerned about the impact of AI on Gartner’s Insights business. We do not see any indication that this is negatively impacting the company’s value proposition. We believe that Gartner has a vast and growing set of proprietary data, generated by hundreds of thousands of interactions with buyers, sellers, and consumers of technology. Gartner also delivers tangible ROI for its customers through its contract review program. AI should be an accelerant for future contracts, and Gartner’s proprietary data is well insulated from AI displacement, in our opinion. We expect growth trends to improve as public sector headwinds abate and the company’s sales force productivity improves. Gartner is repurchasing stock to take advantage of the discounted valuation.

BSD Analysis:
Gartner enters 2026 at the center of the global IT spending boom, with worldwide tech expenditures projected to top $6 trillion for the first time. The company’s 2026 revenue guidance of $6.46 billion reflects a more mature approach to AI, as organizations move beyond pilots to production-scale deployment. Gartner identifies AI Infrastructure (server spending up 36.9%) and Software (up 14.7%) as the fastest-growing investment areas. The firm’s research is increasingly focused on Multiagent Systems (MAS) and Confidential Computing, which are expected to become new industry standards by 2029. Despite being slightly more conservative than some analyst estimates, Gartner’s role as the primary navigator for "GenAI's Trough of Disillusionment" ensures high demand for its research and advisory services.

Pitch Summary:
Shares of P&C insurance software vendor Guidewire Software, Inc. declined during the quarter following strong gains earlier in the year, as the broader software sector came under pressure. After a multi-year transition period, we think Guidewire’s cloud migration is largely complete. We believe cloud will be the sole path forward, with annual recurring revenue benefiting from new customer wins and migrations of the existing customer base to InsuranceSuite Cloud. This progress is best exemplified by Guidewire’s landmark 10-year agreement with Liberty Mutual, the fifth-largest U.S. insurer with $45 billion in direct written premiums, to migrate its entire on-premise deployment of ClaimCenter and adopt PolicyCenter in the cloud. The deal should also help drive adoption among other Tier 1 carriers—now that Liberty Mutual has fully embraced the cloud, others are likely to follow. We believe that Guidewire will be the critical software vendor for the $2.5 trillion global P&C insurance industry, capturing 30% to 50% of its $15 billion to $30 billion total addressable market and generating margins above 40%.

BSD Analysis:
Guidewire has successfully shifted its strategic focus from core cloud migration to expansion into AI-integrated products like PricingCenter and UnderwritingCenter. The company raised its fiscal 2026 ARR guidance to between $1.220 billion and $1.230 billion, with total revenue expected to reach up to $1.419 billion. Management is targeting a subscription and support gross margin of 72% to 73% for the year, reflecting improved operational leverage. The recent acquisition of ProNavigator, an AI-powered knowledge management platform, is a key pillar of its generative AI deployment. With over $1.4 billion in cash and 22% year-over-year ARR growth, Guidewire remains the dominant "operating system" for the global P&C insurance industry.

Pitch Summary:
Spotify Technology S.A. is a leading global digital music service, offering on-demand audio streaming through paid premium subscriptions and an ad-supported model. Shares of Spotify fell as richly valued stocks across a similar peer basket broadly underperformed. In our view, the company’s fundamentals remain intact. Despite recent price hikes, user growth has continued at a double-digit year-over-year pace, with engagement remaining high. Spotify has proven to be a sticky subscription product with relative resilience in times of consumer uncertainty. The company has been on a path to structurally increase gross margins on an annual basis, aided by its high-margin artist promotions marketplace, growing contribution from podcasts, and ongoing investments in advertising. Spotify also continues to innovate across its platform, improving advertising, expanding into video, developing a Super Premium tier, and taking more market share. We still view Spotify as a long-term winner in music streaming with potential to reach 1 billion-plus monthly active users.

BSD Analysis:
Spotify enters 2026 with significant pricing power, recently implementing its third U.S. price hike to $12.99/month for the individual plan. For its Q4 2025 report on February 10, 2026, management has guided for 745 million MAUs and 289 million Premium Subscribers. The "holy grail" for the stock in 2026 is the expansion of gross margins toward 33%, driven by the success of Audiobooks and the Spotify Partner Program for video podcasts. While the Ad-Supported segment has been slower to recover, CFO Christian Luiga expects a definitive turnaround in late 2026. The bull case rests on Spotify maintaining its +8 million net subscriber guidance despite being more expensive than rivals Apple and Amazon, proving the platform's extreme brand loyalty.

Pitch Summary:
CoStar Group, Inc. is the leading provider of information and marketing services to the commercial and residential real estate industries. Shares fell as the company’s net new sales came in below expectations. The stock has been weighed down by significant growth investment in CoStar’s residential product, where sales performance has remained modest. That said, we are encouraged by improving momentum as the company builds out its dedicated residential sales force, enhances its customer targeting, and potentially benefits from changes in Multiple Listing Service practices. We also expect growth in CoStar’s non-residential business to accelerate as sales productivity ramps and the sales team refocuses on core offerings, a trend likely to be amplified by 20% sales force growth in 2025 alone. We believe the value of CoStar’s core non-residential business exceeds the current share price of the stock, suggesting that investors are ascribing little value to the long-term residential opportunity.

BSD Analysis:
CoStar Group has transitioned from "growth at any cost" to a disciplined "burn-down schedule" for its residential portal, Homes.com. The company’s fiscal year 2026 guidance projects revenue between $3.78 billion and $3.82 billion, with adjusted EBITDA forecasted at $740 million to $800 million. A critical catalyst for 2026 is the planned $300 million reduction in net investment for Homes.com (down from $850 million in 2025), with a target for the platform to reach positive adjusted EBITDA by 2030. Despite a high P/E ratio, the firm maintains a "fortress" balance sheet with a current ratio of 3.12 and a gross margin of nearly 80%. Investors are closely watching for proof that the core subscription business remains resilient while Homes.com scales with lower spending.

Pitch Summary:
Shares of global hotelier Hyatt Hotels Corporation increased during the quarter as the company delivered strong revenue per available room and unit growth despite concerns around a weakening macroeconomic environment. Hyatt also reached an agreement with Chase to extend its credit card partnership on improved economic terms, reflecting continued growth in World of Hyatt membership. The company continues to sell owned assets at accretive rates and is redeploying the proceeds through share repurchases. Hyatt maintains an investment-grade balance sheet, and approximately 90% of earnings are generated from fees. Yet the stock trades at a discount to peers despite a comparable growth profile and business mix. We believe this valuation gap should narrow over time as investors gain greater confidence in the durability and resilience of Hyatt’s business model.

BSD Analysis:
Hyatt enters 2026 with a sharpened focus on the luxury and wellness segments, following a transformational year for its Miraval brand. The company is set to open Miraval The Red Sea in Q1 2026, marking its first international luxury wellness resort. For the upcoming earnings release on February 12, 2026, analysts expect quarterly earnings of $0.48 per share on revenues of $1.77 billion, reflecting an 11% year-over-year revenue increase. However, the investment narrative is currently clouded by a bearish revision trend, as the Zacks Earnings ESP stands at -56.51%, suggesting potential pressure on short-term results. Management is prioritizing the expansion of its Lifestyle Portfolio (Andaz, Thompson) and Luxury Portfolio (Park Hyatt) to capitalize on high-end travel demand, though it faces stiff competition from Marriott and Hilton.

Pitch Summary:
During the quarter, we exited our position in Atlassian due to forced attrition. While Atlassian delivered solid results and continued product innovation, we see increasing uncertainty around long-term demand for developer seats and the impact of AI on software development workflows. The planned end-of-life for its data center product adds complexity for large enterprise customers. Given reduced predictability around its long-term value proposition, we reallocated capital to higher-conviction opportunities.

BSD Analysis:
Atlassian enters 2026 with powerful enterprise momentum, reporting its first-ever $1 billion cloud revenue quarter and a 26% year-over-year surge in subscription sales. The company’s AI transformation via the Rovo assistant has reached 5 million monthly active users, significantly increasing seat counts and tool consolidation across its 350,000 customers. While cloud growth has slightly moderated to 24.3% for the full year, a net revenue retention rate of 120%+ highlights the extreme stickiness of its strategic platform. Management has signaled an aggressive buyback phase for the second half of 2026, viewing the current share price as significantly undervalued given its $3.8 billion RPO. The transition of the Atlassian Marketplace to the high-margin Forge platform serves as an additional multi-year tailwind for ecosystem profitability.

Pitch Summary:
Arm Holdings detracted during the quarter despite strong fiscal Q2 results with revenue up 34% and profit up 43%. Royalty revenue growth was driven by data center and higher smartphone royalties, while license revenue also grew strongly. Investor concerns focused on elevated R&D spending and SoftBank-related funding risks. Despite these issues, we remain confident in Arm’s long-term growth outlook as power-efficient computing becomes increasingly critical in AI and data center workloads. We added to the position on weakness.

BSD Analysis:
Arm Holdings is delivering record-breaking results in 2026, with Q3 FY26 revenue jumping 26% to $1.24 billion, driven by insatiable demand for AI and data center architectures. Royalty revenue reached a milestone $737 million, reflecting the high-margin shift toward Armv9 and Compute Subsystem (CSS) adoption in premium smartphones and hyperscaler servers. Despite beating adjusted EPS forecasts at $0.43, shares recently faced a technical pullback as investors weighed a premium 147x P/E ratio against moderating smartphone volumes. Management remains bullish on its long-term trajectory, targeting a $173 price by 2028 based on projected 46.4% operating margins. The firm’s "Physical AI" and Lumex CSS initiatives are successfully diversifying its ecosystem into automotive and industrial IoT verticals.

Pitch Summary:
Dassault Systemes detracted during the quarter following a softer-than-expected third quarter as the company accelerated its transition to a SaaS model. License revenue declined while recurring revenue growth was not yet sufficient to offset the shortfall. Medidata growth also slowed due to weaker clinical trial activity. Despite near-term headwinds, subscription mix continues to expand and management reiterated expectations for recurring revenue to become the majority within three years. We believe Dassault’s mission-critical software, pricing power, and high retention support durable long-term earnings growth.

BSD Analysis:
Dassault Systèmes enters 2026 with a focus on high-margin recurring revenue, which now represents 86% of its software segment. The company is forecast to grow annual earnings and revenue by 10.3% and 5.6%, respectively, supported by a 41% surge in 3DEXPERIENCE Cloud adoption. For the full year 2025, management reaffirmed an EPS growth target of 7%–10% and plans to expand operating margins by 50–70 basis points through 2026. Strategic initiatives like the "Living Heart Project" and AI-powered "3D UNIV+RSES" are deepening the firm's moat in aerospace, defense, and life sciences. While revenues in some mainstream innovation lines have seen a slow start, the company's net cash position of €1.79 billion provides ample flexibility for R&D and strategic bolt-on acquisitions.

Pitch Summary:
Sartorius was a top contributor during the quarter supported by strong third quarter results. Sales grew 10% on a constant currency basis and EPS rose 27%, recovering from a difficult quarter last year. Its bioprocessing division, which represents roughly 80% of sales, delivered 11% constant currency sales growth with all regions demonstrating strong growth, including Asia Pacific. Consumables continued to recover from post-pandemic inventory drawdowns and capital equipment sales showed signs of stabilization. Management raised both full-year sales and margin guidance, reflecting confidence in the underlying growth drivers of biologic manufacturing and signs of an improving environment for biopharmaceutical research. We believe Sartorius’s high recurring revenue base, strong market position, and ongoing innovation should support high-teens earnings growth over the next three years.

BSD Analysis:
Sartorius’ moat is consumables embedded deep inside bioprocessing workflows where switching risks failed batches and regulatory headaches. Once a customer standardizes on Sartorius systems, churn is minimal and recurring revenue is locked in. The COVID pull-forward distorted growth, leaving a digestion phase that tests patience. Pricing power exists but must be exercised carefully in a cost-conscious funding environment. Capital intensity and inventory management matter more when demand normalizes. Competition is credible, yet incumbency buys time through validation cycles. Long-term biopharma growth remains intact, even if near-term spending is choppy. The bull case is normalization with consumables-led operating leverage. Sartorius compounds when science funding catches its breath.

Pitch Summary:
Fast Retailing was a top contributor during the quarter, driven by strong execution across its global operations. China returned to growth in August and September, with management guiding for further improvement in both revenue and profit in the coming fiscal year, a turnaround following topline decline in China this fiscal year. International operations continued to show significant growth and margin expansion, particularly in North America and Europe, where the company continues to target good growth and further margin improvement. Fast Retailing’s scale, efficient supply chain, and ability to offer quality products at attractive prices help navigate macroeconomic headwinds and currency volatility, while ongoing innovation in product design and marketing support brand strength and customer loyalty. With Japan accounting for one-third of Uniqlo’s business and international regions poised for further expansion, Fast Retailing remains well positioned to capitalize on global growth opportunities across its diverse markets and deliver double-digit revenue growth in the years ahead. The manager’s thesis centers on operational excellence and global scale driving durable growth. Margin expansion internationally offsets regional volatility. Supply-chain efficiency and brand strength provide resilience through macro cycles. Continued international penetration supports sustained earnings compounding.

BSD Analysis:
Fast Retailing’s moat is operational discipline masquerading as fashion—Uniqlo wins by treating apparel like manufacturing, not art. Tight SKU control, fast feedback loops, and supplier integration limit markdown risk better than trend-chasing peers. The brand’s value proposition—quality basics at fair prices—travels globally without relying on hype. Pricing power is subtle and earned through consistency, not logos. Japan provides steady cash flow, while overseas growth introduces execution and FX risk. Inventory mistakes are punished quickly, which keeps management honest. Competition can copy styles, but not the operating system behind them. The bull case is continued global Uniqlo penetration with stable margins. Fast Retailing compounds when process scales faster than fashion cycles.

Pitch Summary:
We exited our position in L’Oréal during the quarter due to forced attrition to fund a higher conviction opportunity with stronger growth and an attractive valuation in Sea Limited. While L’Oréal remains a high-quality global leader with resilient categories and a strong innovation engine, recent results and channel dynamics point to moderating growth in the U.S. and Europe, a gradual recovery in China, and inventory tightening in parts of Latin America. While L’Oréal’s increasing scale and large portfolio moves, including recent luxury beauty acquisitions, should help its competitive positioning over the long-term, it will be difficult for the company to outgrow the industry in the near-term. As a result, we chose to reallocate capital to a higher confidence opportunity in Sea Limited.

BSD Analysis:
L’Oréal is global beauty infrastructure disguised as a consumer products company. Demand is tied to identity and habit, not economic cycles, which is why volumes bend but don’t break. Scale in R&D, marketing, and distribution creates barriers indie brands can’t sustainably cross. Investors worry about “newness risk” and miss L’Oréal’s ability to incubate, acquire, or outspend challengers at will. Pricing power shows up through innovation and mix rather than blunt increases. Emerging markets and dermatological beauty extend the runway far beyond mature geographies. This is brand compounding backed by science, not trend-chasing.

Pitch Summary:
Tencent Music Entertainment (TME) was a detractor during the quarter, as concerns around rising competition and margin dilution weighed on investor sentiment despite strong top- and bottom-line results. The continued growth of Soda Music, backed by Douyin’s traffic, raised questions about their potential impact to the long-term competitive dynamics, particularly at the lower end of the market where monetization remains challenging. Additionally, investments in new verticals such as concerts and merchandise, while strategically valuable, are expected to pressure gross margins in the coming year. However, we view these initiatives as attractive as they are accretive to overall profits and should help further differentiate the platform to drive SVIP (Super VIP) adoption which increases average revenue per paying user (ARRPU). We continue to believe in TME’s long-term growth prospects and competitive advantage given its differentiated content ecosystem, strong brand, and ability to innovate and capture new opportunities across China’s evolving music industry. However, we continued to trim the position in the quarter to a below-average weight on relative valuation after strong performance in the first half of 2025.

BSD Analysis:
Tencent Music is the tollbooth on digital audio consumption in China, not just a streaming app chasing subs. Its dominance in music licensing and distribution gives it leverage that smaller platforms simply don’t have. Investors fixate on ARPU optics and miss how social features, virtual gifting, and live audio monetize engagement far beyond subscriptions. Regulatory pressure forced discipline, not destruction, and margins improved as a result. Music consumption is habitual, and churn stays low once users build playlists and social graphs. Cash generation is real and underappreciated given lingering China risk discounts. This is platform economics quietly compounding after a forced cleanup. When sentiment normalizes, the cash flow doesn’t need defending.