Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
Deepwater Asset Management's Gene Munster and Doug Clinton discuss investing in technology with 7investing CEO Simon Erickson.
June 5, 2023 – By Simon Erickson
Investing in the tech industry has been tricky in 2023.
On one hand, there are a ton of exciting new technologies that are hitting the market. Advancements in machine learning and large language models like ChatGPT are unlocking a new wave of AI-native businesses.
But at the same time, the challenging macro is leading several tech companies to take their foot off the accelerator of their growth projects. In response to rapidly-rising interest rates constricting capital, the tech sector has collectively laid off nearly 170,000 employees this year.
So how should investors approach the tech space in 2023? Are the Fed’s interest rate hikes behind us, and are riskier small-caps with less-expensive valuations suddenly quite compelling? Or with so many uncertainties on the horizon, is it wiser to double-down on competitive advantages and dependable free cash flow streams?
To help us answer those questions, we’ve brought in a few expert tech investors. 7investing CEO Simon Erickson recently spoke with Deepwater Asset Management’s Gene Munster and Doug Clinton, who have been investing in technology for decades. Deepwater is a global asset manager based in Minneapolis, MN.
The three kicked off their conversation by discussing Deepwater’s investing philosophy and vision. Gene explains that their firm likes to dive deep into three core areas of technology: AI, automation, and the Metaverse. They use those as a starting point, to further screen for the best-in-breed companies with persistent growth. And finally, they look for the select few which they have the most conviction in; which is something that can’t be easily found or simply modeled in spreadsheets.
Doug goes on to explain the “three buckets” of investing timeframes. Some investors think only in terms of quarterly earnings and others only in terms of long-term trends. But Deepwater prefers to be in the third bucket — from 3 to 5 years — where they can more measurably assess what will happen in the near-term future. It turns out that predicting what the world will look like a decade from now is incredibly difficult.
Gene and Doug both then discuss the FinTech sector, which is quickly transitioning from bricks and mortar to digital. Brazil’s NuBank, Block, and Apple could all be opportunities for investors, as they are gaining share but without having legacy operational costs.
The group then discusses the macroeconomic climate. Gene points to several companies like Home Depot still reporting disappointing earnings, and that is leading to institutional investors being cautious. But bigger-picture, it’s more important to find quality companies and to size into positions over time. Simon asks them about valuation, and they described their methodical process for determining a fair price.
In the second segment, the three discuss several of Deepwater’s larger positions, including Meta Platforms (Nasdaq: META), CrowdStrike (Nasdaq: CRWD), ACV Auctions (Nasdaq: ACVA), and Everbridge (Nasdaq: EVBG). They conclude with a fun “lightning round”, where Simon spots them up with questions about AI and the market’s largest technology companies.
Publicly-traded companies mentioned in this podcast include Meta Platforms, CrowdStrike, Everbridge, ACV Auctions, NuHoldings, Block, Amazon, and Apple. 7investing’s advisors and/or its guests may have positions in the companies that are mentioned.
Don’t miss out on future conversations like this! 7investing will be publishing upcoming interviews with the CEOs of PubMatic, Rocket Lab, and more. Join 7investing’s free email list to get our podcasts and investing insights delivered directly to your Inbox.
Simon Erickson, Doug Clinton, Gene Munster
Simon Erickson 00:03
All right. Hello, everyone. And welcome to this edition of our 7investing podcast where it’s our mission to empower you to invest in your future. You can learn more about our long term investing approach and see our favorite stock market recommendations each and every month at 7investing.com/subscribe.
Simon Erickson 01:03
I’m 7investing founder and CEO Simon Erickson. I’m excited to chat today about investing in technology. Because there’s a lot going on in the tech world these days. We’ve certainly seen the embrace of artificial intelligence and GPT seems to be something on everyone’s mind, as OpenAI now has more than 100 million monthly active users in just its first few months of its release. In addition to that, we’re seeing Silicon Valley and several of the largest tech firms are laying off 10s of 1000s of employees. So there’s a lot to be keeping an eye on.
Simon Erickson 01:33
I’m very excited to welcome my guest to the program today. Gene Munster and Doug Clinton are both managing partners of Deepwater Asset Management. They’re joining me from both the Northeast and Midwest United States today. Gene and Doug, welcome to the 7investing podcast!
Gene Munster 01:48
Great to be here.
Doug Clinton 01:49
Thank you. So excited to chat about a lot of things.
Simon Erickson 01:52
What an interesting time to be an investor today. An interesting macro out there to say the least. We mentioned some of the technologies that have everyone’s attention right now. But maybe let’s start with the 10,000 foot Gene. A lot of people that are familiar with you already with both of you might be associating you with Loup Ventures. You changed names recently. Deepwater is a name change for your firm. Tell me a little bit about the firm that you founded six or seven years ago and kind of what your high level goals are for it.
Gene Munster 02:19
So Deepwater Asset Management is a multi product growth asset management firm. And what’s unique about us is we focus on persistent growth companies invest in persistent growth companies. Those are companies that grow faster for longer. And so that’s what Deepwater Asset Management is. And the name change is representative of a much broader vision that we have for the firm, not only investing in private companies with Loup Ventures, but also in the public markets as well. So Deepwater really doesn’t see the distinction between private and public companies, we look for those disruptive companies with persistent growth. And so the team is the core team is the same. Since switching over to Deepwater, we’ve added a couple big head a couple of big hires. Joe Robolard, has been an asset manager for 30 years, top 10% performance over that time. And also Mike Olson, you may know him from his Netflix days, world famous could have been an X on Netflix. Sassaman, CFO of an Esports company. So joining the other three partners with Doug and that’s nine. So continuing to build out Deepwater. Building on what we started seven years ago with Loup.
Simon Erickson 03:34
Let’s talk about deep dives, Dough. Before we get into start talking about individual companies, you know, it seems like you guys like to do the deep water scuba diving, when you’re looking for insights to companies. In fact, you guys have a depth finder right up there on your website, and you posted some good stuff about conviction. It seems like can you tell me a little bit about your approach? It seems like you’re looking for more of a a smaller portfolio, a more higher conviction idea portfolio with fewer positions, but how do you like to approach new positions that you put into into the portfolio there?
Doug Clinton 04:05
We are. We are looking for that conviction in what Gene just described around persistent growth. So we think that sort of by definition, finding those kinds of companies is a rare thing. And given how rare it is, you can only have a portfolio of a few of those names that end up really hitting. And so for us persistent growth, I always like to use the example of of Apple or Amazon your wind back to 2011. Those stocks are both up 10x over that 12 year period, the s&p 500 is up 3x. And so if you think markets are efficient, then you have to ask yourself, well, why did two stocks 10x? When the broader market only 3x? And the answer to us is that persistent growth characteristic, the kinds of companies though that ended up being the apples and being the Amazons to kind of state the obvious are few and far between. And so when we think about building portfolios, we tend to have portfolios of around 20, stocks, 20 to 25 stocks. So we are more concentrated. And we’re always looking for those kinds of companies where we do have that conviction that there’s the possibility for them to grow longer and faster as Gene described.
Simon Erickson 05:17
And Gene, back to you with with this question, we talked just a little bit more of the 10,000 foot level. But you know, it seems like a balancing act between fundamentals. And in the trenches, you know, the 30, tabs spreadsheet, it looks at the analysis, versus the visionary hat and just say, Okay, what’s the next big thing that’s going on out there? How do you approach investing in the technology industry, where there was a lot of unknowns, certainly out there, with kind of the need for fundamentals and the the other side of investing the other part of the brain, if you will.
Gene Munster 05:45
It starts with the view of where the world is going. And identifying what we see is transformation pockets of transformation. When we started Deepwater in 2017, our manifesto outlines three core areas of what we felt were growth. One was related to artificial intelligence, automation, and the metaverse and two of those three are already taking place, one of them has been slow, but we still believe that ultimately will gain traction. And so we use that as a starting point is these areas where we see transformation.
Gene Munster 06:19
And then based on that we go and do what a lot of investors do, we will screen through hundreds of companies. And then based on what are some of the growth profiles, we come back to that a list of what we think are companies that have persistent growth, and that is a view of on our daily meeting, it is a intensely, it’s, there’s a lot of debate within the meeting related to which companies we should be spending time on, which ultimately have those characteristics of persistent growth.
Gene Munster 06:49
And then we get into the kind of the deep dive of of the modeling piece. And the way Wall Street has evolved. When I started 30 years ago, it was really up to the analysts to build the model of the historic models. Now that’s basically a commodity building your historical models, the what a company just reported, and what the real value comes from that go forward modeling. It’s always been the case, but it’s even more so the case today. And so that’s where we spend our time, we’re not spending time building a lot of these models from scratch, we get miles but we intensely debate all the assumptions going forward to find those companies that are gonna grow faster for longer.
Simon Erickson 07:31
I think Go ahead, Doug.
Doug Clinton 07:33
Yep. So you mentioned the 30 tab model, I think that there’s a lot more to information and details sometimes and investing, where oftentimes it ends up being false precision. And I think a model is super helpful, kind of the Gene’s point where you can look at the numbers, you can put in some forward estimates and just see what that does in terms of value that it might spit out and what you might be willing to pay.
Doug Clinton 08:00
But going back to the idea of conviction, you’re never going to find conviction in a model, whether it has three tabs, or 30 tabs or 300,000 tabs, it doesn’t matter. You can model yourself to death, you always find conviction.
Doug Clinton 08:11
I think when you look at intangibles, and when you look at companies and really figure out what’s behind the company, why do the customers love the product? How big is the market? And why are customers going to keep buying this product to the point of persistent growth, such that whatever numbers you put in the model, you might say, well, this is crazy, this is never going to happen. And then it actually happens. So that that I think is the careful balancing act that you have to use to make sure that you’re not doing anything silly, by using the models making sure you pay attention to fundamentals, but leaving that door open for the intangible things to kind of work their magic because ultimately it is magic when persistent growth works.
Simon Erickson 08:50
Doug has a fantastic piece up on the deepwater site about conviction. He says a couple things in that he says that, you know, your conviction is truly rare out there, you should avoid mediocrity. And just like he said, conviction lives in the intangibles. Doug, it sounds like whether you believe or you don’t believe in the efficient market hypothesis that stocks are priced correctly, where they should be. It seems like there are pockets of things you can look at that the rest of the crowd is not.
Simon Erickson 09:14
Is that a fair statement? What we’re looking at a lot of these opportunities, it’s not so much about P E ratios and quarterly results, but the things that maybe are in the intangibles? Or like the the future trends Gene was talking about.
Doug Clinton 09:26
We do think that. And I think there’s there’s really a sweet spot. If you break up, this is a huge generalization, but if you break up timescales that investors often think on into three buckets. I think a lot of the market is really focused on the next quarter or what’s going to happen this year. We’re kind of myopic, and then you know, earnings hit and the stock goes up 10% or down 10%. And then you have to ask, “Well, did anything really change?” And that should always be your first question earnings. Not did they miss the number, but did anything fundamentally change about the business? So that’s the first bucket where I think lot of investors live.
Doug Clinton 10:01
The second bucket, and maybe we saw this become super popular in 2020 and 2021, is the long duration bucket. People saying, “Well, I’m gonna look out 10 years. And I know for sure in 10 years self driving is going to be a thing or EVs or AI. And so I’m just going to pay whatever price I have to pay because I have to be associated with that idea.” You know, that’s bucket number two. And I think we saw the dangers of that bucket in 2021.
Doug Clinton 10:28
I actually think and this is where we probably spend most of our time there’s this sort of middle ground bucket, which is, can you look out sort of 24 to maybe 40 months. Right, three, three and a half years? And say, “Well, what is the world going to look like then? And how do we build to that world in three years, which can incorporate some of those quarterly and annual things that will happen in the near term, but also not be so myopic that you say, this is all that matters.”
Doug Clinton 10:55
And at the same time balancing, you know, the reality that in 10 years, the world’s gonna be totally different. Whatever you think is going to happen today, the world might have solved it in a completely different way. And whatever you thought was a sure thing, if you just held on long enough, becomes an uncertainty given that kind of timespan. And so I think it’s really about that three to five year bit, that’s where if you as an investor can look at that, you know, timeframe, and say, can I find conviction here, and then test it along the way? I think that’s where a lot of investors find good success.
Simon Erickson 11:30
Gene, you mentioned AI, automation, and Metaverse earlier in the conversation. That sweetspot middle bucket that’s three and a half years out from where we are today: are there any other trends that you think we should be paying more attention to right now?
Gene Munster 11:41
I think another is related to fintech. It’s not a very flashy segment, but it is something that is within that transformation bucket. And, well, we’ve had a kind of surge of App Usage around banking over the last five years. Digital payments, transfer payments, being able to go peer to peer with a money transfer, the the kind of the substance of how banking is done. It’s still largely done when you walk into a bank office, a retail branch, and that we think is something that is going to go away. And the way it manifests itself, opportunities for investors in a company, is NuBank. They’re based in Brazil, but they’re basically the fastest growing bank in Latin America. Especially in Brazil. They have opportunities to grow. And one of the challenges that you don’t realize is that branch system that we know in the US, which has a lot of friction around it that needs to go away. There is even more friction around it when it comes to developing markets for security purposes. And so just to be able to get a checking or savings account opened up, it’s a lot of work. And they’ve really taken a first principles approach to this made it easy, also has some debt instruments that aren’t typically available to people in those regions. And you see this kind of transformative piece.
Gene Munster 13:03
So we don’t talk as much about it just because it doesn’t require as much attention as some of those other kind of core themes. But we think Fintech is an area that we’re also investors. In Block, aka Square, we think that they’ve got a great opportunity, I think some of the things that Apple’s doing, really to be more aggressive in the savings. This high yield savings account that they’ve come up with recently are just an example of some of the banking transformation that FinTech transformation that’s going on in the in the US. And well Block will be competing with Apple, we think that they will be taking more market share from traditional banks. It’s also popular with millennials in terms of kind of a banking, the main primary banking app. And so Nubank and Block are examples of what we think is another kind of transformative area, which is related to FinTech.
Simon Erickson 13:10
SQ is Block and NU for Nubank, if you want to follow along with those FinTech ideas that we just mentioned. I do want to chat about some of the other larger holdings you guys have with Deepwater. But maybe first to give a little bit of context, right now let’s go from 10,000 foot level to maybe 2000 foot level. I’ve got to ask you, if we want to be long term investors, but I know there’s influence of the short term. Right? We’ve seen interest rates increase aggressively right now. And in addition to that, you see a lot of companies, Meta, Microsoft, Amazon, everyone’s laying off 10s of thousands of employees.
Simon Erickson 14:28
As tech investors, how do you think about this macro climate right now? We know that these companies really can step on the accelerator when money is cheap. Or if their stock is perhaps fairly valued, they’re able to issue equity. Now, it seems like they’re kind of cutting back trimming a lot due to the Fed. How do you think about the environment for Tech Tech investing? Gene, you want to answer that one first? And then I’ll come to Doug next?
Gene Munster 14:51
Yeah, for sure. So we think there’s a first question that you need to ask yourself, which is, do you want to time the market? And if that is one of your priorities, we think that it’s best to be cautious right now. There’s been more caution with institutional investors over the past year and that continues to be near record highs. I think it’s appropriate, in part because while we’re seeing a stabilization of interest rates. We still haven’t seen what we think is the economic slowdown. More recently, Home Depot has reported that in their second quarter in a row of disappointing results, and that is after beating expectations for 15 quarters. And we ultimately believe that just this the macro piece or the the fundamentals are going to start to play a bigger role in terms of how investors view the market. And so if the timing is important for you, we’re cautious. We still have high cash positions within the account with this Deepwater account. The fund that we’re talking about here does have a provision for time in the market. And so we still have this cautious view, which begs the question of when we will get more constructive.
Gene Munster 16:02
And the time we get more constructive is when we see more disappointing results effectively. And that is just part of being having conviction is to have conviction when people are more concerned. And so ultimately, we want to be increasing our equity exposure when companies are disappointing, and try to capitalize on some of that downturn. So that’s the first question.
Gene Munster 16:24
And your other piece is, if you’re not as concerned about the timing the market, you just want to own great companies. And that’s where we spend most of our time is just trying to figure out which of those great companies to own and how to appropriately position. I’ll have Doug also answer that piece.
Doug Clinton 16:40
I think that ties right back to the concept of persistent growth that we’ve been talking about. And I think the simple reality, if you think about rates is that I mean, every asset class is sensitive to rates. It’s not just tech, we talk a lot about how tech is rerated as the Fed has raised interest rates. But I mean, if you think of equities as sort of perpetual bonds, where you get the ongoing cash flows from the business as your coupon. When rates go up, yields need to go up just simply for opportunity cost. And the same is true for equities or real estate or other bonds. And for yields to go up, prices need to go down. That’s the simple mechanism that you can kind of keep in your head about this.
Doug Clinton 17:27
How we think that ties to persistent growth is that if you can find those companies that can defy gravity and continue to grow faster for longer, they’re able to continue to generate growing cash flows. Whereby your future yields will be worth the rate that you’re paying today, even if it might look like you’re paying a quote unquote “crazy price”. Which often comes with some growth investing. And I think that’s where we really try to ground ourselves. When we talk about buying great businesses and buying persistent growth. We tried to use that three year lens and say, okay, interest rates are probably going to change in that three year period, what’s a reasonable long term rate to assume it’s probably somewhere in the threes? And then what would the cash flow yield kind of look like on some of these assets? As we think about the growth opportunities that they have ahead of them.
Simon Erickson 18:21
And thoughts on valuation, either Doug or Gene? Are you building DCF and the models and then saying, Okay, this is the price that we want it, we want to buy it or is a little bit more flexible, if you get the right company. You’re not as hard and fast about the rules. But any thoughts on the right price to buy or the valuation models that you have?
Doug Clinton 18:36
We use sort of three approaches, I would say we sort of marry them all. And sometimes it depends on the asset, because some are longer durations. So sort of stories. But we do use, you know, a DCF, 10 year sort of DCF. And just say what has to happen for this to make sense, given a hurdle. I also personally like to use a much more simple sort of stripped down DCF, where you’re using a multiple of free cash flow or a yield. Again, thinking out kind of three years in that model and a hurdle rate in that case. And then we also do pay attention to earnings because I think the market obviously pays a lot of attention to earnings. I think from from a fundamental investing standpoint, you really think about owning a company, you want to think about the cash flows. You think about owning a stock and sometimes the company and the stock aren’t the same thing in the long run. They should be in the shorter run. They may not be. But if you think about the stock I think that’s often much more earnings driven than it is for cash flow driven.
Simon Erickson 19:35
Well, let’s talk about some of those stocks. Let’s stop talking about the higher level bigger picture things. Let’s get our hands dirty and get into the nitty gritty of some positions here.
Simon Erickson 19:42
Your largest position is Meta Platforms. META. My goodness this is a controversial one. One that makes it in the news a lot Gene. But you know, certainly some strong competitive advantages to that one. Why do you guys like Meta Platforms so much?
Gene Munster 19:54
It comes back to that persistent growth in this specific space. About grow faster for longer in this case is based on their daily active user number. It grew at 4% in the March quarter, that was an acceleration from 2% growth in the previous several quarters. And so you have this huge number: 2 billion monthly or daily active users, that’s a big number. That’s hard to do. They’re doing that. They’re growing. And what that means is there are more opportunities for them to sell ads. That is at a headwind relative to the macro, obviously. But as they continue to grow that base, there’s new opportunities for them to sell ads. And the biggest piece of that opportunity. And the next one to two, three years at Doug talked about, is going to be relative to more tools that are used by advertisers.
Gene Munster 20:43
And to quickly talk about two of those tools that can drive persistent growth. One of them is better attribution. And since changes that Apple’s made around tracking, it’s been more difficult for companies like Meta to track users and give data back to advertisers. But they’re using AI to help inform advertisers about ways to build campaigns that is going to attract more advertising dollars. Separately, AI can be used for general purposes to create content, create ad campaigns, that can basically improve the efficiency of what advertisers are going for. And so we think that AI there’s real substance, Mark Zuckerberg has talked a lot about this.
Gene Munster 21:22
And the second piece about longer, persistent growth that leads to META, of course, is the metaverse. And I’d say that most investors think that this is going to be a version of 3d TV, something that there’s a lot of talk about, but never really impacted our lives. In the case of the metaverse, we think that it’s the natural platform beyond the smartphone. And if you have a belief that the smartphone is where innovation is going to end when it comes to consumer tech, then there’s no need for the metaverse. If you believe there’s going to be some platform that’s more immersive whether it’s 2d or 3d or wearable beyond the smartphone, then it’s going to be some form of the metaverse and we think the company is well positioned. On top of all that, even though the stock was up 100% recently, it’s still relatively inexpensive relative to its growth opportunities. It’s still trading at the cheapest earnings multiple for off of next year of any big tech.
Simon Erickson 22:16
Bears might point out that Zuckerberg and Co are spending $30 billion a year on capex largely related to the metaverse or former projects. How would he respond to that Gene? Is that a necessary investment, as they’re kind of the trendsetter?
Gene Munster 22:28
I would break it down into two pieces. 10 of that 30 is based on the metaverse and they’re going to continue to spend in that. I think that if the future plays out, like we believe that it will, it be well spent money. If it doesn’t, they will reduce that spend and you’ll get some earnings leverage. The other 20 billion is in infrastructure, a lot of that relates to this next computing wave that we’re seeing, and we’re gonna hear a lot more of big tech spending large numbers like that. So I would put that as essentially status quo for big tech.
Doug Clinton 22:56
My response to the bears on that is, if you’re worried about capex, I think you’re worried about the wrong things. CapEx for big tech has historically been part of how these companies build their Moats. The ability to spend $30 billion a year is afforded to very few companies. And if you look at Apple, you look at Amazon, you look at Google, you’re looking at Microsoft, all of them are spending 10s of billions of dollars a year in capex. And what it does is when you think about the venture world, which we also spend time in venture capital, we have funds that invest in, you know, everything from seed stage to late stage private companies, the ability for the mega cap tech companies to invest that much into infrastructure really sets them apart from anything that a venture backed company could ever do. And so I see that as a moat where, you know, understand if you’re looking for some reason to be negative on the stock, he might point to Why do you have to spend so much on capex? I would say it’s just reinforcing the reality that these mega cap tech companies are going to be really hard to touch. As we think about those next paradigms, whether it be AI, whether it be the metaverse, they’re going to have a huge lead, and they’re gonna have the infrastructure to support it.
Simon Erickson 24:09
Sounds great. Meta sounds just like it’s spelled: META. One of the largest positions. Another one you guys are like is CrowdStrike, the cybersecurity company. We know that there’s a lot more threat surfaces that you need to protect against, as the internet becomes more and more ubiquitous. What can you tell us about CrowdStrike that you like so much?
Doug Clinton 24:29
There’s there’s two big things. One is to your point around cyber and just these attack surfaces. It’s just they just get broader and broader from a corporate perspective, every year. I think that cyber is one area where we’re going to see that persistent growth from a market perspective, where every year enterprises are going to have to spend more money to make sure that they stay ahead of the threats and keep their sensitive data and especially customer data protected.
Doug Clinton 24:56
What CrowdStrike does is they focus on endpoint security. So they’re really trying to secure things like phones and laptops, and especially now that we have worked from home or flexible working. Everybody has these devices out in the wild at this point. And so I think endpoint has become even more important in the last few years with COVID. But that’s kind of piece number one for us, is we think there is a persistent growth market there. And they’re the leader in a really important part of a persistent growth market.
Doug Clinton 25:27
To put it in a little bit of perspective, the company at their last investor briefing, which was a couple months ago, is talking about doubling ARR, roughly doubling by fiscal 26. So in the next three or four years, if I remember which calendar they’re on, and then doubling it, again, to 10 billion in five years after that. So they think they have a huge opportunity ahead of them. We agree with that.
Doug Clinton 25:51
And, you know, if you can 4X your revenue base in a seven or eight year period, we think that the stock is going to do really well alongside that.
Doug Clinton 26:00
The second piece, and I think this is a little bit more of optionality for them is there’s a theme in the cyber world around consolidation. Vendor consolidation. And if you look at how some of these enterprises are managing their cybersecurity issues, they’re working with dozens and dozens of vendors. I remember looking at a diligence call of a, it was a private fortune 1000 company, so a fairly sizable company. And they said that they were working with more than 100 Different cybersecurity vendors to address all their needs. Which is a crazy number. And the person was saying it’s just really hard to manage. And they want to reduce that 100 down to like a dozen.
Doug Clinton 26:42
And so for us, we kind of spend time asking ourselves, okay, if there is this consolidation play, who has the products where you can kind of take out some of these smaller vendors? And who are the big vendors that these customers trust right now and they want to spend more with? We think CrowdStrike is one of the answers to that question. And so we think, aside from just the overall growth in the industry, they also have this potential tailwind from consolidation and being a consolidator gathering up some of those budgets as enterprises try to reduce the number of vendors they’re working with.
Simon Erickson 27:15
It’s a perfect land and expand model, right, Doug? I mean, cybersecurity moves fast. Like you mentioned. CrowdStrike comes from and hails from McAfee, you know. Their founder and CEO’s from McAfee and saw a more efficient way to do in the cloud. But then that Falcon platform, I believe, has got more than 23 modules now. So you can offer different things as customers needs evolve. Great one. CrowdStrike CRWD. Gene, did you want to add anything on that? Or should we chat with about another company here?
Gene Munster 27:41
Let’s chat about another one.
Simon Erickson 27:43
Yeah, let’s go on to another one that I was familiar with was ACV Auctions. ACVA is the ticker on this one, one that others might be unfamiliar with on the call to what can you tell us about this one?
Gene Munster 27:52
This one is Doug’s passion. Yeah.
Simon Erickson 27:55
Doug, the question to you then tell me about ACV Auctions.
Doug Clinton 27:58
Yeah. ACV is an online automotive marketplace. And I think Gene is perhaps teasing me slightly, and that it’s a passion because I have a history. My family has a history in the auction business. And in fact, my dad actually used to be an auto auctioneer. He worked at Mannheim, which is one of ACV’s big competitors there. They were an offline auction. Now they have this simulcast live internet platform that competes with ACV.
Doug Clinton 28:26
But anyway, to answer your question, ACV is an online automotive marketplace. And what they’re doing is they’re essentially helping dealers sell wholesale inventory to other dealers. That’s the bottom line. They just reported their quarter last week. And we were really encouraged by the quarter. I think that one of the concerns about the story has been can they get to profitability. And actually, we had a larger than expected margin print. In this last quarter, they’ve had really great attach rates with some of their value added services.
Doug Clinton 29:03
What they do, aside from facilitating these transactions, you can think of it kind of like eBay, right, where they’re facilitating transactions between these auto wholesalers. They also add products that are sort of like insurance. In some cases, they have a product called Go Green, where if someone buys a car or wholesaler buys a car, and there’s some defect that they didn’t identify before, you sort of avoid the arbitration process and ACV deals with the value discrepancy in the car. So insurance like products have been good for them, they’re good margin. They also have a transportation product where they can get a car from one wholesaler to another from from seller to buyer. And so you know, it’s one that we’ve become I think growingly excited about it’s still a smaller cap company.
Doug Clinton 29:52
So you know, as you as you said, not a lot of people have heard about it. I think even the institutional investor community it’s probably under followed and under watched and as they continue to print some of these good quarters and hopefully keep beating numbers in that three year period where he’s looking for. Hopefully we’ll have more investors paying more attention and sort of agreeing with us as the stock continues to work.
Simon Erickson 30:16
Did I hear correctly that you’re recommending the company that was a competitor of the company that your dad worked for?
Doug Clinton 30:22
Yeah, my dad doesn’t work there anymore. He’s clear, free and clear. So no, no insider information or competitive issues.
Simon Erickson 30:30
I was just wondering about Thanksgiving dinner. If it made for interesting conversations at the table?
Doug Clinton 30:34
That’s a good one. Yeah, we’re all good. We’re all good.
Simon Erickson 30:36
And then thoughts on EVs? Are EVs changing this industry at all, specifically? Tesla, I know that Elon loves the direct model versus dealerships, which is kind of the traditional way to do it. Has that changed kind of the industry or the landscape at all? Do you think?
Doug Clinton 30:48
I don’t think so. I would, I would navigate us back to that, you know, timeframe question. So certainly not in the next quarter, two year timeframe. One, I don’t think that EVs even though they are obviously growing in popularity, I don’t think the adoption will affect the used car market in any meaningful way over the next kind of three to four years. If you zoom out 10 to 15 years, you know, maybe there’s something you can make a case around then but I think you’re still going to have used EVs. Not all of them will be Teslas. I could have really fun debates about what percentage may or may not be Teslas. But you know, I think when you think about the timescale that you’re really investing in, it seems unlikely that EVs will really cause an issue in any investable timeframe.
Simon Erickson 31:37
Fantastic. Go ahead, Gene.
Gene Munster 31:40
No, I just welcome the debate. We’ll have to come back and debate EV market share with Doug. It will be always entertaining.
Simon Erickson 31:46
It is. It’s a rapidly changing industry to say the least. Gene, I’ll give you the option of one more to talk about, would you like to talk about Carmax, Everbridge, or Workday? All three of which are holdings of the of the fund any of those that you’d like to briefly touch on?
Gene Munster 32:02
I’m going to focus on the larger caps. And I’m going to defer to Doug.
Simon Erickson 32:07
Yeah, go ahead, Doug. Carmax? Everbridge? Let’s talk about Everbridge. Maybe we can we talk about Everbridge. That’s a less familiar name for a lot of people.
Doug Clinton 32:15
Yeah, we can talk a little bit about that. One. They provide, essentially, essential messaging products for governments, for example, they actually just had a little bit of a snafu with Florida where they sent out if you can imagine the alert on your phone that makes that screaming noise that you want to turn off as fast as possible. They facilitate some messaging like that when there are emergency things that communities, whether it be government communities, or otherwise, sort of need to know about. Everbridge helps facilitate the distribution of those messages.
Doug Clinton 32:51
And so it’s a really interesting company because they focus on this sort of niche product. They just had a new CEO come on board from Google about a year I think it is now. And it’s a story that I think, like ACV, is a little bit under followed. And one that has that characteristic of persistence in the sense that there’s not a lot of other companies that really offer this particular service. And so we think they kind of have this unmitigated runway to continue to capture share of something that probably won’t change. You know, whether we’re living in the metaverse or we’re continuing to do smartphones, getting information, critical messages to people in timely manners, I think it’s always going to be an important thing in the real world. And so having that infrastructure as Everbridge does, I think will continue to be part of important services that customers need.
Simon Erickson 33:48
Well, fantastic. As we’re wrapping this up, and with the opportunity to speak with two seasoned veterans who have been investors in the tech space for several decades, I couldn’t pass on the opportunity to do a fun lightning round. That’s a little bit off script here. But if you guys are ready, I’m going to rapid fire a couple of questions for both views. We close this out. Gene, I’ll come to you first with the first lightning round question: “What is the most exciting application for AI today?”
Gene Munster 34:13
Chatbots, today. Autonomy over the next three years.
Simon Erickson 34:18
Doug. How about that? Anything else?
Doug Clinton 34:23
I can’t disagree with that. I think yeah, I think it is autonomy. I think it’s over the next five plus years. So I would just change the timeframe on that.
Simon Erickson 34:31
Okay, second question, Doug. I’ll go to you first on this one, which is that OpenAI is still a private company. But it just had a private market valuation of up to $29 billion. Sam Altman says it’s going to be one of the most expensive companies in the world because of all the costs required for training involved with AI. Knowing that we’re at $29 billion today, what do you think the proposed valuation of OpenAI in three years? And are they publicly traded? So we’re in 2023? What’s the At the valuation of open AI in 2026?
Doug Clinton 35:04
Valuation is probably over 100 billion. I don’t think they’re publicly traded. And I do think the quick bonus answer, that the cost of training is one of the most important problems in AI to be solved right now. We are super excited about the ability for some companies that are in what we call the second generation of AI chips. That sort of space evolving from NVIDIA GPUs. To find a solution that’s cheaper, we have a company in our venture portfolio called Rain Neuromorphic, that we think is possibly a solution to that. But I think that’s a space investors should be paying a lot of attention to is how do we solve the cost of all these models? Because ultimately, if it’s too expensive to run the software and allow it to continue to learn, it’s not gonna be able to do all the great things we think it can.
Simon Erickson 35:52
Gene, $100 billion. Is the actual retail price of OpenAI higher a lower than that by 2026?
Gene Munster 35:57
Before Doug answered, yeah, that was the number that came into my head. I think it’s spot on that $100 billion. And I would just put, want to emphasize, underscore one thing that Doug just mentioned, there are two things to take away from our conversation today. It’s one thing Deepwater invests in persistent growth companies. And second, remember the name Rain Neuromorphic. This is one that potentially could go to zero, but has the potential to be 100x type of upside and couldn’t be in the same conversation as AMD, Intel, and Nvidia in the next decade.
Simon Erickson 36:27
And then my final question, Gene, I’ll start with you on this one, because you’ve made some fantastic calls over the years. Apple being one of them. But let’s talk about big tech companies. The two largest in the market right now are Apple and Microsoft. Apple is a $2.7 trillion company, Microsoft about $2.4 trillion right now. Which company will have the largest market capitalization of publicly traded firms in the year 2030? Is it one of those two companies? Or is it something else?
Gene Munster 36:53
I think it’s Apple, I’ve been a long believer in Apple, but that I don’t keep that belief based on tradition. It’s what I see going forward. And there are two areas that you’re going to see progressively. Number one is that investors are going to start to see this more as a consumer staple companies. Surprisingly, consumer staples trade at higher multiples than tech companies. And just the a growing base of users 2 billion plus grow at 8% in the December quarter. I think that’s something that is a faster pace of its user growth. And Microsoft has an on top of that they’ve got some new marketing into it when it comes to Apple, it’s related to the metaverse, we’ll likely see their new preview of their new wearable headset, and the next month won’t really add revenue in the next for the next few years. But that’s something and don’t forget about the car, and they want to build a car whether or not that sees the light of day is something else. But that is a big market that could be 25% of their revenue in 2030. And so that’s a large market that they could go after it. When it comes to Microsoft, they have an opportunity just to AI-ify their products. To me, that’s not as exciting as going into new markets that Apple has that optionality up to so I’ll take Apple on that.
Simon Erickson 38:07
Doug, last word is yours.Convincing case. Do you agree Apple’s the largest company by 2030?
Doug Clinton 38:12
I think I would take the field if I had to pick one. I’ll give you two in the field. And why I think Google or Meta are maybe dark horses to be one or the other of biggest market cap company. The reason for Google could be if they do figure out AI, I still think and we probably all agree AI is is the next internet. It’s probably the biggest opportunity from a tech standpoint that we’ll see in the next 10 plus years. And I think they’re there. They’ve been underestimated how much work they’ve done in AI. And I think how good their products will ultimately be if they figure that out. They could be the biggest company. Meta, the Dark Horse, the case is that the metaverse actually happens and takes off. And if that really does happen, they own this more vibrant social layer where people are spending even more of their time. It’s hard to imagine why they wouldn’t be the most valuable company in the world.
Simon Erickson 39:04
Absolutely. Well, gentlemen, thanks for letting me have some fun and ask some lightning round questions off script. Really appreciate you both being on the 7investing podcast here today.
Gene Munster 39:13
Thanks. Thank you.
Simon Erickson 39:14
And if anyone wants to learn more about deepwater asset management, their website is deepwatermgmt.com. You can learn about their approach to long term investing, especially in the tech sector. So thanks to Gene and Doug.
Simon Erickson 39:25
Thank you for tuning in to this edition of our 7investing podcast, where it’s our mission to empower you to invest in your future. We hope you have a great week!
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