Investment Pitches

Pitch Summary:
This year, I've added to our investment in Pinduoduo, the Chinese eCommerce company. Suffice it to say that Pinduoduo is one of the most polarising companies I've come across. At home in China, it has entrenched itself into the daily lives of almost a billion people. As it built trust and scale, it laddered up from selling cheap fruit and unbranded toilet paper to leading brands like Apple, L'Oreal and Dyson. It continues to take market share from hamstrung incumbents Alibaba and J.D. as urban consumers trade down and rural consumers trade up. Overseas, however, bashing Pinduoduo's international arm Temu has become a popular pastime. The Financial Times' Dan McCrum, who covered the Wirecard fraud, calls Temu a "Chinese flea-market" and has insinuated (poorly) that Pinduoduo's books are dodgy. The French government voted to penalise 'fast fashion' platforms like Temu, lest they "[wipe] out everything that is not luxury in the market", as one activist put it. In fact, it was the condescension towards Temu last year which prompted me to invest. I had seen it before from consumers in Beijing and Shanghai c. 2019-2020 as Pinduoduo began its meteoric rise. Pinduoduo's model is simple: it aggregates and concentrates a tremendous amount of consumer demand into a limited selection of SKUs, then sends these orders directly to factories to secure the lowest prices – a model it calls consumer-to-manufacturer ("C2M"). If this sounds familiar, it's because it is highly analogous to Costco – only that Pinduoduo does it online, where it can operate at an extreme scale. Pinduoduo offers rewards and discounts for completing little games within its app, but the real thrill comes from scrolling for bargains in its algorithmically powered feed. Despite investing heavily in growth – launching grocery business Duoduo Maicai in August 2020 and Temu in September 2022 – Pinduoduo's operating margins widened from 9% in 2Q21 (its first quarter of profitability) to 30% in 1Q24, its most recent quarter. The company also relies on third parties for fulfilment, so its asset-light model is more akin to eBay than vertically integrated peers like Amazon and Alibaba. It requires virtually no fixed investment to grow: from 2Q21 to 1Q24, operating assets increased by just 21% while revenue and operating income grew 4 and 13 times, respectively. All the cash is piling up: Pinduoduo earned more in interest income in 1Q24 than it did in operating income in 1Q23. When a company of Pinduoduo's quality and potential trades at 11x this year's earnings, Mr. Market is telling you he thinks something doesn't smell right. Is it a real business? Are Pinduoduo's earnings sustainable? I hope I've answered the former question in the affirmative. As for the latter, Pinduoduo has continued to profitably take share this year in China. I do acknowledge, however, that competition is increasing as Alibaba and J.D. get their houses back in order. They are cutting commissions and advertising fees to encourage merchants to cut prices. But they are constrained by their existing business models, product categories, user base and merchants. Pinduoduo aggregates demand and achieves low prices in a fundamentally different way. Overseas, Pinduoduo's expansion has become a question of geopolitics. While consumers clearly enjoy Temu's low prices, politicians don't like its Chinese origins. There is some truth in the argument that state subsidies have pushed China Inc. into overcapacity, which it is now trying to export. But that same Chinese overcapacity is keeping a tight lid on global inflation at this critical juncture post-COVID. Mr Market appears certain Temu will fail, and maybe he's right. But what if he's wrong? Great investments reward us for recognising when prospects are mispriced. Pinduoduo isn't without risk. Temu must run the political gauntlet. But what if it succeeds? What if the new innovations to its model bring it closer to that nirvana of low cost and good quality? What if its efforts to diversify away from America help it take root in new markets like Europe and Japan? What if it eventually reaches enough scale in certain markets to attract established brands, just as Pinduoduo does in China? Even if the odds are indeed low, the payoff should more than compensate.

BSD Analysis:
The manager presents a contrarian bull case for PDD Holdings, emphasizing the market's mispricing at 11x earnings despite exceptional fundamentals. The investment thesis centers on Pinduoduo's unique consumer-to-manufacturer (C2M) model that aggregates demand to secure factory-direct pricing, creating a sustainable competitive advantage over traditional e-commerce players. The company has demonstrated remarkable operating leverage, expanding margins from 9% to 30% while growing revenue 4x and operating income 13x since 2021. The asset-light model requires minimal fixed investment for growth, generating substantial cash accumulation. In China, Pinduoduo continues gaining market share from Alibaba and JD.com by serving both urban consumers trading down and rural consumers trading up. The manager views geopolitical concerns around Temu as creating an asymmetric risk-reward opportunity, where success in international markets could drive significant upside given the low valuation and high-quality business model.

Pitch Summary:
TSMC has contributed the lion's share of our gains this year, as the rush to invest in Generative A.I. ("GenAI") has led to a cyclical recovery in demand and fab utilisation. I can assure you that I in no way predicted GenAI or what it would mean for TSMC. However, it was a safe bet that when the cycle turned, for whatever reason, all roads would lead back to TSMC. Let me explain. It took TSMC decades to earn its customers' trust and win the leading edge (i.e. to become uniquely capable of manufacturing the smallest and most power-efficient transistors). It is now the only independent foundry of its scale and sophistication which can serve customers free of conflict, no matter what they're designing. Mr. Market has come around to my view: I wrote to you in the third quarter of last year that TSMC's ADR premium collapsed in the wake of market fears. That premium has since expanded to a twenty-year high as demand surges and TSMC moots raising prices.

BSD Analysis:
The manager presents a compelling bull case for TSMC based on its unassailable competitive moat in advanced semiconductor manufacturing. The thesis centers on TSMC's decades-long investment in earning customer trust and achieving technological leadership in producing the smallest, most power-efficient transistors. The GenAI boom has created a cyclical recovery that validates the manager's long-term conviction, with TSMC's ADR premium expanding to twenty-year highs as demand surges. The company's position as the only independent foundry of scale capable of serving customers without conflicts provides pricing power, evidenced by management's consideration of price increases. The manager's contrarian timing appears vindicated, having maintained conviction when the ADR premium collapsed due to market fears. TSMC's technological leadership and customer relationships create significant barriers to entry that should sustain its dominant position regardless of specific end-market drivers.

Pitch Summary:
Expedia (EXPE $125.99, $16.4B market cap) continues to execute on its technology transformation. Its B2B (business-to-business) segment is humming. People are just starting to understand its value. When properly valued, we think you're paying only 2-3x EV/EBITDA for the core consumer piece (which is still growing!). As Mr. Market is slow to reflect the value, the company is gobbling up its own stock. Repurchases alone should allow the company to compound earnings in the teens.

BSD Analysis:
Patient Capital Management maintains conviction in Expedia despite poor stock performance, highlighting the company's successful technology transformation and strong B2B segment performance. The manager believes the market is beginning to recognize the value of the B2B business, which when properly valued makes the core consumer segment available at an attractive 2-3x EV/EBITDA multiple despite continued growth. The investment thesis is supported by aggressive share repurchases as management takes advantage of the market's slow recognition of value. The fund expects these buybacks alone to drive earnings growth in the teens, creating a compelling risk-adjusted return profile in the travel sector.

Pitch Summary:
We initiated a position in Everi Holdings (EVRI $8.40, ~$700M market cap) in the quarter. Everi is a gaming hardware, technology and services provider. The stock traded at $15 a year ago and hit a low of $6.37 in the quarter. Sales have slowed with the economy and in advance of new game launches, which will come later this year. The company announced a merger with IGT's gaming business. The combined company will be a market leader in an oligopolistic industry (leaving 3 main players post deal) with significant cash generation capacity. We think the stock is worth mid-teens using conservative assumptions, roughly double current prices.

BSD Analysis:
Patient Capital Management initiated a new position in Everi Holdings during the quarter, capitalizing on significant price weakness that saw the stock fall from $15 to a low of $6.37. The company provides gaming hardware, technology, and services, with current sales pressure attributed to economic slowdown and timing ahead of new game launches expected later this year. The key catalyst is Everi's announced merger with IGT's gaming business, which will create a market leader in an oligopolistic industry with only three major players post-transaction. The combined entity should have substantial cash generation capabilities. Using conservative assumptions, the manager values the stock in the mid-teens, representing approximately 100% upside from current levels.

Pitch Summary:
We've bought more Kosmos Energy (KOS $5.54, $2.6B market cap), an offshore oil and gas exploration and development company on the verge of significant production growth, as well. Its' significant reserves of low-cost, low-carbon energy are an attractive long-term asset. As development CapEx falls, free cash flow should surge. At current commodity strip prices, we expect it to generate $1.30 per share in free cash flow next year, a 23% yield on the current stock price. It will initially pay down debt but should be in a position to return cash to shareholders in the second half of 2025. KOS is one of the only energy names we've found with significant potential upside at $65 a barrel WTI crude. We think it's an acquisition candidate, and worth more than double the current price.

BSD Analysis:
Patient Capital Management has increased their position in Kosmos Energy, an offshore oil and gas company positioned for significant production growth. The investment thesis is built on the company's low-cost, low-carbon energy reserves and an inflection point in cash flow generation as development capex declines. The manager projects $1.30 per share in free cash flow next year, representing a compelling 23% yield at current prices. The company plans to initially focus on debt reduction before returning cash to shareholders in late 2025. Notably, Kosmos offers upside potential even at modest $65/barrel oil prices, making it relatively defensive within energy. The fund sees potential for the company to be acquired and values it at more than double current levels.

Pitch Summary:
We initially bought IAC Inc (IAC $46.85, $3.96B market cap) a year ago and added to it in the quarter. It's run by some of the best capital allocators in the world, Barry Diller and Joey Levin. It pulled back to levels below where we started buying despite significant improvement in business fundamentals. We think the stock is worth ~$90, including a 20% conglomerate discount, about double the current price.

BSD Analysis:
Patient Capital Management has been building a position in IAC over the past year, adding during the recent quarter as the stock declined below their initial purchase levels. The investment thesis centers on exceptional management quality, specifically highlighting Barry Diller and Joey Levin as world-class capital allocators. Despite the stock's poor performance, the manager notes significant improvement in underlying business fundamentals. The fund applies a 20% conglomerate discount to their valuation but still sees the stock as worth approximately $90, representing roughly 100% upside from current levels. This represents a classic value opportunity where strong fundamentals are being overshadowed by market sentiment.

Pitch Summary:
Fortunately, we recognized Nvidia's potential and bought it early in the year. It was capturing the bulk of AI profits with a significant market lead and deep competitive advantages. We believed it was more like Microsoft than Cisco, which implied significant potential upside to its intrinsic value. It's since more than doubled and reached our bull case level. To justify current market expectations, we believe Nvidia needs to accomplish something unprecedented, like sustaining its current 65% operating margins for decades. That's possible, but unlikely. Even if it happens, it won't be linear. What's more likely is that Nvidia continues to surpass near-term expectations with the launch of its Blackwell chips later this year, which will be undersupplied. Markets would likely extrapolate any strength. For now, we are watching Nvidia closely. It continues to outperform on most days and the fundamental backdrop remains intact. The market will likely give us the first signal that change is afoot. We never like to sell our winners after only a matter of months, especially in taxable accounts. We aim to maximize returns, which requires we remain flexible. Nvidia's giant move this year closed the discount to intrinsic value. While we can't make the case that it's undervalued, we also don't believe it's significantly overvalued, which is typically where euphoria ends. We will be monitoring it carefully.

BSD Analysis:
Patient Capital Management recognized Nvidia's AI dominance early and established a position when the stock was undervalued. The manager views Nvidia as having significant competitive advantages and market leadership in AI, comparing it favorably to Microsoft rather than Cisco during the dot-com era. The stock has more than doubled since purchase, reaching the fund's bull case target. The manager acknowledges current valuations require unprecedented margin sustainability but believes near-term catalysts like Blackwell chip launches could drive further gains. Despite the massive appreciation, they maintain the position as the stock isn't significantly overvalued yet. The fund is monitoring closely for market signals of sentiment change while remaining flexible on timing.

Pitch Summary:
Option Care is the leading provider of in-home infusion and alternative site infusion services in the U.S., with a dominant 22% share. The market is heavily fragmented with CVS and Optum as the only other players with scale. In-home infusion is gaining share over infusion centers and clinicians and patients value in-home care due to patient convenience and better outcomes. We expect the penetration of the infusion market to continue along historical trends. As a business, Option Care is a prodigious free cash flow generator and it returns capital to its shareholders in the form of buybacks. We admire the company's recurring revenue profile and its long growth runway. Our intrinsic value for the company is $42/share, which is derived from discounted cash flow analysis.

BSD Analysis:
Madison presents a compelling bull case for Option Care Health based on its dominant 22% market share in the fragmented U.S. home infusion services market. The investment thesis centers on the structural shift from infusion centers to home-based care, driven by patient convenience and superior clinical outcomes. With only CVS and Optum as scaled competitors, Option Care benefits from limited competition and significant market fragmentation among smaller players. The company demonstrates attractive financial characteristics as a "prodigious free cash flow generator" with consistent capital returns through share buybacks. Madison values the recurring revenue model and long-term growth runway as home infusion penetration continues expanding along historical trends. The $42 per share intrinsic value target, derived from discounted cash flow analysis, suggests meaningful upside potential from current levels. The thesis relies on continued healthcare delivery evolution favoring home-based care and Option Care maintaining its market leadership position while benefiting from industry consolidation dynamics.

Pitch Summary:
The INSP purchase was based on our work suggesting the total addressable market for INSP's hypoglossal nerve stimulation (HGNS) device for moderate to severe sleep apnea was quite large, and further refinements to the device would increase the utilization of patients looking for an alternative to CPAP. CPAP, while a very successful form of therapy, has a high non-compliance rate of 35%. The business has great gross margins and significant operating leverage as revenue scales. Revenue growth has been exceptionally strong, averaging 65% per annum over the last five years. The barriers to entry for its product are bolstered by strong clinical data and its head start in the HGNS market. Our work suggests that competitors will be at a significant technological disadvantage when they launch. We forecast $17/share earnings power by 2030. The stock had pulled back significantly following their fiscal Q2 due to unrealistically high expectations for increased guidance. We believed this was an opportunistic entry point. However, recent clinical data around the impact of GLP-1s on moderate to severe sleep apnea were more constructive than expected. While we think the impact on INSP's market is minor, we believe it prudent to step away from the investment currently. We will continue to monitor the investment and will revisit the name once the current volatility recedes.

BSD Analysis:
Madison initially viewed Inspire Medical Systems as an attractive opportunity in the large sleep apnea market, targeting patients seeking alternatives to CPAP therapy which suffers from 35% non-compliance rates. The company's hypoglossal nerve stimulation device addresses moderate to severe sleep apnea with strong clinical data and first-mover advantages creating technological barriers for competitors. Inspire demonstrated exceptional 65% annual revenue growth over five years with attractive gross margins and significant operating leverage potential. Madison's $17 per share 2030 earnings forecast reflected confidence in the addressable market expansion and device refinements. However, recent clinical data showing GLP-1 drugs' effectiveness in treating sleep apnea introduced unexpected competitive dynamics. While Madison believes the impact on Inspire's market is minimal, the development created sufficient uncertainty to warrant exiting the position despite the attractive fundamental story. The decision reflects prudent risk management amid evolving treatment paradigms, though Madison continues monitoring for potential re-entry opportunities once volatility subsides.

Pitch Summary:
Legal Zoom (LZ) delivered a challenging first quarter result. During the earnings conference call, management openly discussed losing market share in the all-important first quarter, which has historically been the seasonally strongest quarter for new business formations – the locomotive of LZ's business. This is troubling for several reasons. Our thesis has been that LZ solutions offer automation for new business formation with arguably the easiest, most comprehensive, and cost-effective solution, competitively speaking. New business formations historically have grown at a 5% compound annual growth rate (CAGR) and growth above that must come from market share gains. So, losing market share is quite possibly a thesis breaker, which is why we have not opportunistically added to this investment. So, why are we holding on? Legal Zoom has a debt free, cash rich balance sheet. Following the poor results and stock sell off, the board announced a material expansion of their stock buyback program, a signal, we believe, in their confidence regarding the long-term opportunity for the company. Furthermore, there were several company specific reasons why the company viewed the share losses as temporary. Most importantly, a deliberate pullback in marketing spending as they reorganized and streamlined their salesforce. Although this investment is on a short leash, if the company can display share stability in the next few quarters, we would consider adding to our position. Legal Zoom is quite profitable, with solid operating margins and, we believe, a very attractively valued stock.

BSD Analysis:
Madison maintains a cautious neutral stance on LegalZoom following disappointing Q1 results that revealed concerning market share losses during the seasonally strong business formation period. The investment thesis previously centered on LegalZoom's competitive advantages in business formation automation, but losing market share in a historically 5% CAGR market represents a potential thesis-breaker. Management attributed the weakness to temporary factors, primarily reduced marketing spend during salesforce reorganization, though this explanation requires validation. The company's debt-free, cash-rich balance sheet provides defensive characteristics, while an expanded share buyback program signals management confidence. LegalZoom maintains solid profitability with attractive operating margins and appears undervalued following the selloff. However, the position remains on a "short leash" with Madison requiring evidence of market share stabilization before considering additional investment. The outcome hinges on whether recent share losses prove temporary or indicate structural competitive challenges in the digital legal services market.

Pitch Summary:
Form Factor is a semiconductor test equipment company with a clean, cash-rich balance sheet and very little competition. The moat in this business is very high as they integrate tightly with their customers, which are other test and semiconductor companies, and over many generations of products, making new entrants highly unlikely and market share shifts marginal. FORM's business is driven by a simple equation: new designs plus an increase in test intensity drive revenue growth. Test intensity is defined as how much more testing a new chip design requires over prior generations. The AI DC buildout is driving demand for a new kind of memory chip called High Bandwidth Memory or HBM. Nvidia's graphic processing units require HBM chips alongside them, and FORM has dominant market share at the current leading HBM maker SK Hynix. Test intensity for HBMs is estimated to be 25% higher than traditional memory. We continue to be optimistic about FORM's fundamentals, with the understanding that quite a lot of optimism may already be reflected in the stock price.

BSD Analysis:
Madison presents a compelling bull case for FormFactor based on its dominant position in semiconductor test equipment with minimal competition and high barriers to entry. The company benefits from tight customer integration across multiple product generations, creating significant switching costs and market share stability. The investment thesis centers on the AI datacenter buildout driving demand for High Bandwidth Memory (HBM) chips, where FormFactor holds dominant market share at leading manufacturer SK Hynix. With HBM test intensity 25% higher than traditional memory, FormFactor is positioned to benefit from both volume growth and higher testing requirements per chip. The company's clean balance sheet and cash-rich position provide financial flexibility. However, management acknowledges valuation concerns, suggesting much of the optimistic outlook may already be priced into shares. The thesis relies on continued AI infrastructure expansion and FormFactor maintaining its technological leadership in an evolving semiconductor landscape.

Pitch Summary:
Deere & Company is the runaway leader in the global farm equipment industry. The company has the strongest network of dealers in the U.S., and incredible brand loyalty among generations of farmers. "Precision ag" is revolutionizing the farming industry through automation and productivity tools, which increase crop yields and lower costs for the farmer. We believe Deere is the standout leader in these technologies through its farsighted commitment to technology investments that it's maintained over the last couple decades. This dedication through the inevitable ups and downs of the agriculture cycle has enabled Deere to manufacture equipment today that is seamlessly integrated with precision ag technology packages. As a result, we believe Deere's competitive advantage has widened considerably relative to peers who must deal with a legacy of frequent acquisitions and changes in corporate strategy. The other benefit accruing to Deere from its technology investments is the ability to create new revenue streams beyond selling equipment. Deere is now monetizing services and analytics under its "John Deere Operations Center" platform where farmers can manage their operations through a single software application. Importantly, revenues generated from farmers subscribing to various precision ag tools are much higher margin and recurring in nature. While this opportunity is still relatively early, Deere believes software revenue can grow to 10% of total by 2030. The current outlook at Deere is clouded by a downturn in the market for ag equipment due to low commodity prices, high interest rates, and a hangover from an unprecedented boom in demand. This uncertainty presented the opportunity to invest in Deere shares at an attractive price.

BSD Analysis:
Madison Investors Fund initiated a position in Deere & Company, capitalizing on cyclical weakness in agricultural equipment markets to acquire shares of the industry leader at attractive valuations. The fund's thesis centers on Deere's dominant competitive position, built through decades of technology investments in precision agriculture that have created significant barriers to entry. Unlike competitors hampered by acquisition-heavy strategies, Deere's consistent R&D focus has resulted in seamlessly integrated precision ag solutions that command premium pricing and customer loyalty. The investment case is strengthened by Deere's transition to higher-margin, recurring software revenues through the John Deere Operations Center platform, with management targeting 10% of total revenue from software by 2030. Current headwinds from low commodity prices, elevated interest rates, and post-boom demand normalization have created temporary margin pressure but present an opportunistic entry point. Madison views Deere's technological moat and software transformation as sustainable competitive advantages that will drive outperformance as agricultural cycles normalize.

Pitch Summary:
We purchased shares in Starbucks Corporation and Deere & Company. Starbucks is a global specialty coffee chain with an iconic brand that resonates with consumers around the world. Its loyalty rewards program is a true differentiator, with its unmatched scale (nearly 33 million members in the U.S. alone), and convenient mobile ordering and customization capabilities. The company has struggled over the last handful of years due to the pandemic shut-downs, the lingering traffic declines from workers no longer commuting to city centers, intensifying competition in China, and inflation in wages, freight, and packaging. But its biggest challenge is actually one of its own making. It's a victim of its own success. Over the last decade it has led the industry in shifting its business mix from hot beverages to cold beverages, and from in-store purchases to the use of mobile ordering and drive-thrus. These shifts have been hugely beneficial to Starbucks, intensifying customer loyalty, raising the frequency of purchases, appealing to younger consumers, and raising average selling prices. Yet, these benefits came at a very high price. The speed at which these shifts occurred left Starbucks management unprepared to handle the increase in operational complexity and customer expectations of faster service. The result was a noticeable decline in both customer experience and store employee satisfaction. After a couple of years of muddling to find solutions, we believe that the company is now addressing the matter with the urgency it requires. To improve efficiency, Starbucks is refurbishing stores with new equipment and layouts that make it easier to make the increasingly complicated drinks sought by customers. Store staffing levels and schedules are being adjusted to better deal with the changing demand patterns. The company is working to improve the mobile app's utility, so that it can better estimate wait times, have a better check-out experience, and be used at licensed stores where mobile ordering isn't currently available. And so on. These initiatives will take time to implement but should yield material improvements. Investors' focus on the sluggish recent results presented the opportunity to purchase shares at a discount to our estimate of underlying business value.

BSD Analysis:
Madison Investors Fund initiated a position in Starbucks, viewing the coffee giant as a turnaround opportunity trading at a discount to intrinsic value. The managers recognize Starbucks' operational challenges stem from being a 'victim of its own success' - the rapid shift to mobile ordering and cold beverages created complexity that outpaced management's ability to execute efficiently. The fund appreciates the company's strong competitive moats, including an iconic global brand and a differentiated loyalty program with 33 million U.S. members. Management is now addressing operational inefficiencies through store refurbishments, improved staffing models, and mobile app enhancements. The investment thesis centers on operational improvements driving margin expansion as the company resolves service speed issues and employee satisfaction concerns. Madison views the current market pessimism around sluggish results as creating an attractive entry point for a quality franchise with sustainable competitive advantages.

Pitch Summary:
PayPal's stock has underperformed so far in 2024, down nearly 3% year to date while the broader market saw a 14.50% increase. The stock's muted price action reflects a lack of growth catalysts and an increase in competitive threats, most recently from Apple with their introduction of "Tap to Cash" at its Worldwide Developers Conference. Despite these challenges, PayPal managed to deliver a promising Q1 earnings report. In the latest quarterly earnings release, PayPal exceeded revenue and earnings per share consensus estimates, signaling positive momentum for the company. Revenue grew by 9% year over year, driven primarily by increasing transaction revenue. Despite a slight decrease in the number of active accounts, the number of payment transactions per active account grew by 13%, mitigating any negative impact on the top line. PayPal's focus on cost discipline is evident as profitability outpaced revenue growth. Operating income increased by 17% year over year, significantly outpacing revenue growth, which allowed the company to boost non-GAAP earnings per share by 27%. The company generated adjusted free cash flow of $1.9B for the quarter and $5.4B over the last 12 months. Much of this free cash flow is currently being used to repurchase shares at what we believe to be attractive levels. On a trailing 12-month basis, share repurchases of $5.1B reduced weighted average shares by 5%. Management told investors on the earnings call that they expect Free Cash Flow for 2024 to come in at approximately $5 billion and to spend at least $5 billion for share repurchases. At the time of writing PayPal is valued at ~$60B, or $59 per share. This translates to a 14.86 times TTM earnings ratio, (significantly below the P/E ratio of over 20 for the S&P 500), a price to book of 3 times, and a FCF yield of 8%. In its current state, PayPal is trading at its lowest valuation in its 9-year public history for P/E, P/B, and P/FCF, indicating a severely pessimistic outlook by the market. Based on our model, we can see that PayPal's EPV can range from $42 to $62 per share. At its current price, the market is pricing in little to no growth for PayPal going forward. We find that this pessimistic outlook does not line up with the history of the business or with its current situation: PayPal holds 45% of the global payments market share, making it the #1 payment processor globally. PayPal has 426 million active users, comprising consumers and merchants. 36 million merchants use PayPal in over 165 countries worldwide, a CAGR growth of 10.76% over the past five years. Businesses using PayPal have 25% better conversion rates than their cohorts. Large enterprises that use PayPal see 33% more completed checkouts than traditional payment methods. Shoppers paying through PayPal spend 12% more than those using other payment methods. PayPal users purchase 60% more frequently compared to other digital buyers. In summary, we do not think PayPal's growth trajectory ends here. The business has a worldwide footprint with network effects in some of the fastest growing industries such as digital payments, ecommerce and Buy-Now-Pay-Later.

BSD Analysis:
The manager presents a compelling value case for PayPal, emphasizing the disconnect between market pessimism and fundamental strength. Despite competitive pressures from Apple's "Tap to Cash," PayPal delivered strong Q1 results with 9% revenue growth and 27% EPS growth, demonstrating operational leverage. The company's focus on profitability over growth is evident with operating income rising 17% while maintaining robust free cash flow generation of $5.4B annually. At 14.86x trailing earnings and 8% FCF yield, PayPal trades at its lowest valuation in nine years, below broader market multiples. The manager's Earnings Power Value analysis suggests fair value between $42-62 per share, indicating limited downside at current levels. PayPal's dominant 45% global market share, 426 million active users, and superior conversion metrics provide defensive moats in digital payments. The aggressive $5B annual share buyback program at depressed valuations should drive meaningful per-share value creation, making this an attractive risk-adjusted opportunity in the growing digital payments ecosystem.

Pitch Summary:
As of May 9th, 2024, we have sold our entire position in the Brazilian merchant acquirer business StoneCo, for a net return after tax considerations of 61.4%. This sale provides us with an opportunity to discuss our thinking when it comes to selling a portfolio company and analyze the facts and reasoning behind our decision. We published our original investment thesis for StoneCo on March 18th, 2023. In the write-up, we discussed the business overview, qualitative and quantitative factors affecting the business, and our thoughts on the investment opportunity. Our thesis was backed by three fundamental ideas: 1. The business was selling far below our estimate of intrinsic value. 2. The risks that created the value opportunity were well-known (priced-in), transitional in nature, and non-fatal. 3. The market seemed to be ignoring interest rate optionality which would've significantly changed the P&L of the company. We were very fortunate in that our #3 played out in quick fashion as inflation in Brazil continued its decent throughout our holding period. This allowed our #2 to be priced in accordingly and ultimately addressed our #1, bridging the gap between an extreme undervaluation to a more rational price, which brings us to our reason for selling the stock. What changed was our adjusted NAV dropped slightly to USD $ 1,476B but the market cap nearly doubled, changing the original risk/reward profile of the investment. At the higher valuation, our exposure to downside risk increased from 40% to nearly 70% from a NAV perspective. It's important to remember that investments are not just valued in absolute terms but also relative to other opportunity sets. For us to invest in a fintech business (ever-changing industry dynamics) domiciled in Brazil (less familiar political, socioeconomic, and regulatory framework), we require a larger margin of safety than would be required for a business in a more stable industry with lower external risk factors. From an operating perspective, Stone's latest results also gave us some cause for concern. For example, selling expenses increased 36% year over year, while consolidated revenue grew just 14% over the same time-period. The management and board of directors have gone through numerous changes, most notably at the CEO and CFO levels since our initial investment. The latest quarter also saw Stone make an internal accounting change to revenue recognition for membership fees. The revenue is now being deferred throughout the lifetime of the client. When asked about this change on the latest earnings call, management told investors that they do not disclose how many months are currently being used to calculate customer lifetime value. While this might be considered a minute detail in analyzing an entire business, we do care about how management communicates with investors, the simpler and more straightforward, the better. Any attempts to obfuscate data through accounting practices or language raises red flags for us.

BSD Analysis:
The manager executed a successful exit from StoneCo, realizing a 61.4% net return after identifying a deteriorating risk/reward profile. The original thesis centered on extreme undervaluation, transitory risks, and Brazilian interest rate optionality, which played out favorably as inflation declined. However, the stock's near-doubling increased downside exposure from 40% to 70% relative to net asset value, prompting the sale decision. Operating metrics showed concerning trends with selling expenses rising 36% while revenue grew only 14%, indicating margin pressure and competitive challenges. Management turnover at key positions and opaque communication regarding revenue recognition changes raised additional red flags. The manager demonstrated disciplined capital allocation by recognizing when the original investment thesis had run its course. This exit exemplifies value investing principles of buying undervalued assets and selling when fair value is reached, particularly in higher-risk emerging market fintech investments.

Pitch Summary:
Unlike many other watch brands, Rolex is not owned by a publicly traded company; instead, it operates as a private entity. The Hans Wilsdorf Foundation, named after Rolex founder Hans Wilsdorf, holds ownership and control of the Rolex brand. This distinctive ownership structure enables Rolex to maintain independence and prioritize long-term strategies. Prior to acquiring Bucherer AG, a Swiss luxury watch and jewellery retailer, Rolex operated only one retail store in Geneva, focusing exclusively on watch making. With its perpetual founding spirit, Rolex and the Hans Wilsdorf Foundation are dedicated to promoting and supporting charitable projects in fields such as environment, science and arts. Over the past few decades, Rolex has evolved from a renowned watch manufacturer to a dominant market leader. Through continuous innovation, high-quality standards, and clever brand management, Rolex has steadily increased its market share and strengthened its position in the global luxury watch segment. The closest proxy to owning Rolex via the stock market is Watches of Switzerland Group plc (WOSG). Following its consolidation of the UK watch retail and jewellery market under Apollo's private equity ownership, the company went public in 2019 with Barclays, our former employer, leading the deal. The primary goal was to further consolidate the US market, building from a small base. Since its IPO, Watches of Switzerland has significantly flourished in the US market, highlighting the strong track record of its management team. WOSG has established itself as a leader in the luxury watch retail sector in the UK with approximately 40% market share and is mirroring this success in the US. Renowned for its extensive network of multi-brand and mono-brand stores, as well as online websites, WOSG enhances brand exclusivity while prioritizing exceptional customer service and the luxury retail experience. This includes personalized services, high standards in store design, and operations that cater to the discerning tastes of luxury watch buyers. Industry insiders consider WOSG well-positioned to further consolidate the fragmented US luxury watch retail market, emphasizing its pivotal role as a strategic partner to Rolex. Currently holding an 11-12% market share in the US Rolex segment, WOSG aims to expand this to 25% in the long term. Its strong relationships with key watch brands like Rolex, Patek Philippe, and Audemars Piguet are critical for securing sought-after model allocations, driving sales, and maintaining a competitive advantage. The Bucherer deal announcement posed uncertainties on Rolex retailers and negatively impacted WOSG's share price. As only Rolex authorized dealers can sell Rolex watches, these dealers rely heavily on their relationship with Rolex and must meet stringent customer service standards set by the brand. Allocating more store licenses and sought-after Rolex models to Bucherer at the expense of other dealers could be seen as a straightforward move, albeit one limited to initial considerations regarding WOSG. A subsequent profit warning, caused by an unexpected shift from less precious metal to more steel watch allocations, further unsettled investors. After thorough due diligence and consulting with industry experts, we believe the concerns are unfounded and the market misinterprets the situation. In fact, evidence suggests that Rolex retailers were collectively allocated less higher value watches and we are convinced that Bucherer is expected to receive no preferred allocations of store licenses or watches over WOSG. The Rolex/WOSG relationship is stronger than ever. After reviewing WOSG's "Long Range Plan" and discussing with company management, it's evident that WOSG is poised for substantial growth with Rolex. This includes expanding into further prestigious locations such as opening the largest global mono-brand Rolex store on Old Bond Street in London. The newly launched Rolex Certified Pre-Owned program in which WOSG is a key enabler has also shown very promising early results. As the largest global Rolex dealer, we believe Rolex is vested in WOSG's success, reducing the risk of competitive harm and potentially encouraging Rolex to consider acquisition rather than adversarial action against WOSG. The prospect of a scenario where, for instance, LVMH gains control over the largest Rolex distribution network in the UK and US could be daunting for Rolex. This concern is heightened by the fact that WOSG lacks a strategic shareholder. In FY24, WOSG reported a solid free cash flow of GBP 118m, excluding GBP 78m of expansionary capex and GBP 47m for acquisitions. This demonstrates the company's robust cash generation capability, even under challenging market conditions. The capital expenditure plans include GBP 300-350 million for existing stores and GBP 350-500 million for new stores and acquisitions (FY24 – FY28). These investments are expected to yield high returns, short pay-back times and support significant double-digit earnings per share growth. Today, WOSG presents a compelling investment opportunity due to its strong market position, strategic brand relationships, and significant growth potential. The company's business model, focused on high-margin products and exceptional customer experiences, is supported by substantial high-yielding capital investments aimed at long-term EPS growth. Despite potential macroeconomic sensitivities, the high-quality, and strong cash generation of WOSG's business positions it for significant upside over the medium- to long-term. The primary concern affecting our investment case is the significant risk associated with its key supplier, Rolex. Therefore, it is imperative for management to uphold its exceptionally strong and uniquely personal relationship with Rolex's management. Considering these factors, along with Rolex's deeply conservative and trust-based culture, we find ourselves willing to accept this risk.

BSD Analysis:
The manager presents a compelling bull case for Watches of Switzerland Group as the closest public market proxy to owning Rolex. The thesis centers on WOSG's dominant market position in UK luxury watch retail (40% market share) and its strategic expansion in the fragmented US market, where it aims to grow from 11-12% to 25% market share in the Rolex segment. The manager addresses recent concerns around Rolex's acquisition of Bucherer and subsequent profit warnings, arguing these fears are misplaced and that WOSG's relationship with Rolex remains strong. Key financial metrics support the investment case, with FY24 free cash flow of £118m and planned capex of £650-850m over five years expected to drive double-digit EPS growth. The manager emphasizes WOSG's role as the largest global Rolex dealer and suggests Rolex has vested interest in WOSG's success, potentially making it an acquisition target. The primary risk acknowledged is the concentrated supplier relationship with Rolex, though the manager believes this risk is mitigated by the strength of the partnership and Rolex's conservative culture. The investment appears positioned to benefit from luxury watch market consolidation and WOSG's expansion into premium locations.

Pitch Summary:
Nvidia's market capitalisation at the start of the period was $2.3tn and at the end $3.1tn. That is the equivalent of an addition of a company the size of Tesla or – for UK investors – the equivalent of the five largest companies in the FTSE 100. In our view, the staggering rise to date has been justified. Nvidia finds itself in a unique situation in that it is at the moment the only company that can supply the means to develop AI models. Its customers are also those businesses that are the largest, and most cash-generative companies in the world, who are extremely motivated to make their own AI tools. We have had an overweight position in the fund since Q2 2023 and it stands as our top contributor over one year (to June end). While for some time our estimates for Nvidia's earnings were well ahead of the analyst community, we are now becoming more wary of the level of optimism and numbers we are seeing appear from analysts leading us to be more cautious.

BSD Analysis:
The manager maintains a bullish stance on NVIDIA despite its massive $800 billion market cap increase during the quarter, viewing the company as uniquely positioned in the AI infrastructure buildout. The fund has held an overweight position since Q2 2023, making it their top contributor over the one-year period. The investment thesis centers on NVIDIA's monopolistic position as the sole supplier of AI development infrastructure to the world's largest and most cash-generative companies. However, the manager is becoming increasingly cautious about analyst optimism and earnings estimates, suggesting potential valuation concerns. The position has been trimmed following strong performance to maintain balanced risk-reward. This reflects a disciplined approach to position sizing while maintaining conviction in the long-term AI theme. The manager's early positioning and willingness to take profits demonstrates strong portfolio management discipline.

Pitch Summary:
JBG Smith Properties presents a compelling investment opportunity due to its strategic control over a significant portion of real estate in the rapidly developing National Landing area. The company benefits from a unique combination of robust supply and demand fundamentals, a significant discount to its net asset value (NAV), and a strong capital allocation strategy. Despite recent setbacks, including Amazon's temporary pause on HQ2 development, JBG Smith's assets are positioned to benefit from long-term growth trends in the region. The company's focus on multifamily properties and its ability to manage leverage effectively further enhance its investment appeal.

BSD Analysis:
JBG Smith's strategic positioning in National Landing, where it controls a substantial portion of developable land, provides a competitive advantage that mitigates typical real estate cyclicality. The company's multifamily assets, which are experiencing high occupancy rates and robust rent growth, are valued conservatively at a 5.5% cap rate, suggesting significant upside potential. Despite a high leverage ratio of approximately 9.5x net debt/EBITDA, JBG Smith maintains ample liquidity with $1.3 billion available through cash, unencumbered assets, and a revolving credit facility. The company's proactive capital allocation, including significant share buybacks at a discount to NAV and a prudent dividend policy, underscores management's commitment to long-term value creation. While challenges remain, such as the broader office market downturn and Amazon's hiring delays, JBG Smith's strategic initiatives and asset quality position it well for future growth. For more context, see [JBG Smith's Investor Relations](https://www.jbgsmith.com/investors).

Pitch Summary:
Underinvestment in fleet assets; average age of the fleet is ~20 years, the management is only incentivized to buy back stocks rather than investing in shares; fleets have low utilization rate relative to peers; Update 7/10/24 - Follow-up report: The company has significant amount of debt unable to refinance. Update 9/25/24 - Follow-up report: Merger termination is a serious blow; structurally bad business; Update 2/28/25 - Follow-up report

BSD Analysis:
WillScot Mobile Mini is a leader in modular office rentals. The short thesis is that growth has been driven by aggressive acquisitions and pricing power that may not be sustainable. With leverage elevated, slowing construction activity could expose downside in utilization rates. Bears argue the market underestimates cyclicality tied to industrial and construction end-markets.

Pitch Summary:
Sohu.com Inc. presents a compelling investment opportunity due to its substantial cash reserves held outside China, which are not subject to the country's capital controls. The company is actively executing a significant share buyback program, which is expected to support and potentially increase the stock price. The buyback is substantial relative to the company's float, excluding shares held by the founder, Charles Zhang. The gaming division, Changyou, is highly profitable and provides a strong cash flow, which further bolsters the investment case.

BSD Analysis:
Sohu.com Inc.'s current market capitalization is $460 million, while its cash, short-term investments, and long-term deposits total $1.3 billion, suggesting a significant undervaluation based on cash alone. The company's liabilities amount to $826 million, leaving a net cash value of $474 million after liabilities, or $955 million when tax liabilities are ignored. The ongoing $150 million buyback program is a strategic move to enhance shareholder value, especially given the limited float available for trading. Founder Charles Zhang's significant ownership stake and history of returning capital to shareholders through dividends suggest potential for future special dividends or privatization attempts. However, risks remain, particularly the potential for increased losses in the media division, which has historically been a financial drain. Despite these risks, the strong performance of the gaming division and the strategic buyback initiative provide a solid foundation for a bullish outlook.