A monthly update of the Compound 8 to 80 Portfolio…
Performance Review and Market Environment
The 8 to 80 Portfolio gained 2.22% (net of fees) in February.
In a repeat of January, equities came under pressure in the last week of the month. This time, the sell-off was blamed on rising interest rates and inflationary fears as the 10-Year Treasury yield has moved from 0.92% to start the year to 1.46% at the end of February. The positive spin on this move is that rates are rising for good reasons, because the end of covid-19 is finally in sight and the economy is expected to continue its rapid recovery in the coming quarters.
Overall, investor risk appetite remains extraordinarily high, with SPAC IPO issuance on pace to surpass last year’s record total before the end of March.
–Google reported revenues and earnings which beat expectations by a wide margin ($56.90 billion revenue vs. $53.13 billion estimate; $22.30 EPS vs. $15.90 estimate) as the comeback in ad spending has been much faster than anyone anticipated.
Year-over-year, revenues were up 23.5%, bouncing back sharply from Q2’s rare decline (on slower ad spending during the shutdowns).
Key to revenue growth in Q4 was the surge in YouTube ad revenue to $6.89, an increase over 46% from the prior year (source). YouTube now has over 30 million music and premium paid subscribers and over 3 million YouTube TV subscribers. The YouTube acquisition in 2006 for $1.65 billion might have been the “best tech deal ever.”
Google Cloud also continues to grow at a rapid pace, with $3.83 billion in revenue, a 47% increase over the last year.
Overall, Google’s revenues total $183 billion in 2020, up 13% over 2019 and a 6x increase over the last 10 years.
With net income of $40 billion, it is now one of the most profitable companies in the world.
–Amazon reported a 44% increase in revenues over the prior year, its 77th consecutive quarter of double-digit YoY revenue growth. It was also the highest growth rate since Q3 2011. It goes without saying that few companies have benefitted from the stay-at-home economy as much as Amazon.
Net Income hit a record $7.2 billion, up 121% over the prior year.
A key driver to this profitability has been the phenomenal growth in its high margin cloud business, Amazon Web Services (AWS). AWS revenues grew 30% in 2020 to $45.4 billion.
In the 4th quarter of 2020, AWS accounted for 10% of Amazon’s revenues and 49% of its operating income (source).
Amazon’s tremendous growth during the covid-19 pandemic has necessitated a commensurate increase in its workforce. While most companies were laying off workers or on a hiring freeze, Amazon was on a record hiring spree. The company now has 1.3 million employees, a 500,000 increase (63%) from a year ago. Few companies in history have hired this many people in a single year.
The big news: Jeff Bezos will be stepping down as CEO later this year. Bezos has arguably had the most impressive tenure of any CEO in history, growing revenues from $150 million in 1997 to $386 billion in 2020. That’s a 39% annualized growth rate.
Perhaps even more impressive was the patience investors afforded Bezos in pursuing his long-term vision, as Amazon lost money in their first 6 years as a public company. That patience was rewarded, as profitably over the the past 2 years has exceeded all previous years combined by a wide margin.
–Spotify‘s monthly active users (MAUs) grew 27% year-over-year to 345 million, exceeding expectations. In 2020, Spotify added a record 74 million users (vs. 64 million in 2019).
Premium subscribers increased 25% over the past year to 144 million, beating expectations. In 2020, Spotify had a record increase of 30 million subscribers (vs. 28 million in 2019).
Revenues were up 25.8% over the prior year to $2.6 billion, a new high. Of this, a little over 87% came from subscriptions while the remainder came from ads. Ad revenue hit a new high in Q4, growing 29% over the prior year and quickly rebounding from the YoY decline in Q2.
Spotify reported positive free cash flow of $79 million but a net loss of $149 million during the quarter.
Spotify is forecasting continued growth in 2021…
In terms of content, Spotify continues to expand its non-music offering, with 2.2 million podcasts on the platform (up from 1.9 million in Q3). Notably, 25% of their MAUs engaged with podcast in Q4 with consumption hours nearly doubling over the prior year. In December, “The Joe Rogan Experience” podcast became exclusive to Spotify, driving a large increase in listeners.
Spotify made another acquisition in the podcast space in December, acquiring Megaphone for $235 million. The acquisition will allow Spotify to make dynamic streaming ad insertion available to third-party podcast publishers for the first time.
–Shopify continues to be one of the largest beneficiaries of the covid-induced transition to a stay-at-home economy.
Revenues hit a new high during the quarter at $978 million, a 94% increase over the 4th quarter of 2019.
Net Income over the last year hit $320 million, the first profitable year in the company’s history (vs. $125 million net loss in 2019).
In the last 5 years, Monthly Recurring Revenue (MRR) has compounded at an astounding 49% annualized rate.
The top performers during February were Zillow (+23.7%) and Shopify (+16.6%).
The bottom performers during February were Apple (-8.0%) and Alibaba (-6.3%).
A new position was initiated in Twitter.
Position size in Zillow was reduced after a sharp advance.
End of Month Exposures
Cash and Cash Equivalents: 38%
To learn more about the 8 to 80 portfolio managed by Compound, read our post and FAQ here.
To sign up for our free newsletter, click here.
Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security.
Past performance is no guarantee of future results. Performance results are shown net of fees and include dividends and other adjustments. All performance data is strictly illustrative and may differ from actual results.
Discussion of portfolio holdings are for illustrative purposes only and are not investment recommendations. The portfolio holdings are subject to change at any point in time.
For our full disclosures, click here.