Q4 Letter - 2020
January 1st is typically a day to celebrate the start of something new. People across the world make New Year’s resolutions and say to themselves, “this year I am serious.” Maybe I am describing my own life? It’s safe to say for all of us, a renewed sense of vigor and vitality returns into our lives. For a short period of time, mind and body are aligned, and we are motivated to achieve more in our life, to become a better version of our prior selves.
This New Year’s felt different. It wasn’t as much a hopeful spirit for the future as it was a sigh of relief for the end of 2020. Unfortunately, the clock striking midnight didn’t take us back to “normal.” The struggles of 2020 flooded into 2021 as the deadly virus continues to spread, and now our American Republic is being tested in ways we have never before experienced. My heart hurts as I witness one nation of Americans who love this country dearly, yet are so violently divided over politics, facts and alternative facts. As much as we longed for a fresh start, getting to the other side of this struggle is going to take more than wishful thinking. Fortunately for America, we are a country of people who consistently rise to the challenge and will persist until our lives and nation return to normality and civility.
In terms of Mirador, we remain committed to applying the utmost care and attention to managing your, as well as our own, capital during these tumultuous times. While it is difficult to predict what 2021 will bring, we do have the power to choose how we prepare ourselves, and how we react with our investments. We are very happy with how well our strategies performed in 2020, and we hope to carry that momentum and success into 2021.
“No one ever sold a share of stock thinking it was going to go up from there. Always ask yourself why someone is selling it to you.” – Mark Cuban
DoorDash is VC-backed restaurant delivery business that had their IPO in December. Earlier in the year, as COVID-19 forced restaurants across the country to simultaneously shut their doors, pick-up and delivery became the only options left. In the first nine months of 2020, DoorDash tripled their sales over the prior year. Despite hyperbolic sales, DoorDash was still incapable of turning a profit, instead it reported a net loss of $150 million. Many analysts covering this stock have stated that the company has no plausible path to future profitability. Regardless, FOMO took over and investors dashed to get in on… the future of food delivery? Shares skyrocketed on opening day to 85% above its IPO price. Today DoorDash is sporting a $50 billion market cap, on par with Workday, and valued at 50x forward revenues. Investors have priced the business as if it were the next Amazon. As a result of this mania, private VC-backed companies are now clamoring to access the public markets. After all, why sell part of your business to a VC at 15x revenue, when public investors will give you 50x?
A company that goes public through the traditional IPO route files an S-1 and waits 6-12 months for regulatory approval. This process is complex and expensive, so companies typically only go public when they are mature and ready. In 2020 they couldn’t wait. There was an all-time record 480 IPOs in 2020, more than double those in 2019. That’s also 20% more than the previous record in 2000 at the peak of the dot-com bubble. For companies that hadn’t planned to go public, and felt left behind, reverse mergers via Special Purpose Acquisition Companies (“SPACs”) provided an alternative route which could bring them public in under 30 days. Needless to say, 2020 was also a record year for SPACs. Finally, companies that are unable to SPAC have been securing deals under the table. In fact, within the last 30 days we have already received two unsolicited offers of existing investors seeking to sell their shares in well-known pre-IPO startups through privately negotiated secondary transactions. In businesses where retaining equity value is considered the Holy Grail, why are these CEOs and VCs so eager to exit?
There is a massive bubble expanding in the US stock market. CEOs and VCs are aware of this. They are taking advantage of the retail investors who are either slow to recognize or have no fear. The truth is, unless we are entering a new world paradigm, which we are not, there can be no Cinderella ending for 50x revenue stocks and their associated “investors”. While it is near impossible to find value in US stocks today, value does exists abroad – we believe investors may look back on 2021 as a generational accumulation opportunity Emerging Market and Asia Pacific assets,
"Let China sleep, for when she wakes, she will shake the world." – Napoleon Bonaparte
Over the past decade, China has shown the world the economic impact of bringing one-fifth of the world’s population out of poverty and into 21st century consumerism. The country is currently projected to grow into the world’s largest economy by 2028, which will ultimately create new channels for the flow of global capital throughout the broader Asia Pacific region. Unfortunately, US investors have not positioned their investments to benefit from this shift. Asian securities currently account for less than 1% of total assets in US portfolios.
A new and large middle class is forming in the age of technology and consumerism, and the chart below shows the magnitude of their purchasing power. Keep in mind the economic backdrops in each country in 2020. China by “Double 11” in November, had already been out of lockdown and physical retail had recovered. Thus, there was no temporary policy pressuring consumers to purchase online rather than in-person, as there was in the US. As a number of countries in APAC are projected to develop into high-income economies over the next 5-10 years, the runway for future growth remains long. Thus, the acceleration of online sales in 2020 is likely not a peak, but rather an inflection point in a hockey stick curve.
This higher growth trajectory, compared to the US and Eurozone, translates directly into higher interest rates and higher yielding financial assets. With German Bunds and US Treasuries returning a negative real return, APAC may be one of the few remaining markets in the world, with enough capacity to support a global inflow of capital, where investors can still access yield – global investors cannot afford to ignore these assets for much longer.
“eBay may be a shark in the ocean, but I am crocodile in the Yangtze River.” – Jack Ma
Alibaba is an example of an APAC company that we believe has the potential to produce outsized returns for investors over the next few years. Years ago, Alibaba was viewed as a wannabe-eBay. Today, it is the Amazon of Alibaba is an example of an APAC company that we believe has the potential to produce outsized returns for investors over the next few years. Years ago, Alibaba was viewed as a wannabe-eBay. Today, it is the Amazon of China, commanding over 70% market share of e-commerce transactions in the country. It also operates in enterprise cloud computing (47% market share), fintech (54% market share of mobile payment transactions), and even brick-and-mortar grocery retail.
Due to recent localized and international regulatory risks, investors have indiscriminately sold Alibaba stock 30% below its October high to what we believe are fundamentally undervalued and technically oversold levels. Shares of Alibaba are trading at 15x EBITDA, which is in line with the S&P500 and a large discount to its US counterpart Amazon at 24x EBITDA. We believe the current headwinds will prove to be short lived, thus bad news developments over the next 12 months should be viewed as buy-the-dip opportunities.
2020 was a great year for Mirador and the strategies we manage. Like all businesses we had to make our workarounds, so we apologize if you happened to feel any delays in care or communication, and appreciate your understanding. We are entering 2021 stronger than ever, but none of this would have been possible without our clients. We wish you and your families well, we wish you good health, and we are looking forward to tackling this next year head on, together.
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Information presented reflects the personal opinions, viewpoints and analyses of the employees of Mirador Capital Partners, LP, an SEC-registered Investment Adviser. The views reflected in the commentary are subject to change at any time without notice. Nothing herein constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Mirador Capital Partners, LP manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. Visit us at miradorcp.com for more information.