PRE TAX NTA |$3.53
Value as at close of business on 7 March 2025
PRE TAX NTA |$3.53
Value as at close of business on 7 March 2025
Insights
Value as at close of business on 7 March 2025
Value as at close of business on 7 March 2025
Registered Office and Share Registry Office
Hearts and Minds Investments Limited
c/- Boardroom Pty Limited
Level 8, 210 George Street
Sydney NSW 2000
Telephone: 1300 737 760 or +61 2 9290 9600
Email: heartsandminds@boardroomlimited.com.au
Principal Place of Business:
Suite 12.04A, Level 12, Chifley Tower
2 Chifley Square
Sydney, NSW 2000
Email: ir@hm1.com.au
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Amazon
Amazon reported strong numbers for the fiscal fourth quarter results and provided a solid guide for the first quarter. What impressed our fund manager the most about Amazon’s quarter is the retail business profitability. North American operating margins came in at 8%, and international margins were 3% in the quarter. Our fund manager believes that Amazon can continue to drive these retail margins higher over time, and that consensus doesn’t appreciate the margin expansion levers that the company has at its disposal. Specifically, Amazon continues to improve its logistics footprint, and the ‘cost to serve’ (i.e., the logistics cost to deliver an item to a consumer) continues to come down over time.
After heavily investing in fulfilment capacity during COVID, Amazon continues to optimise this fulfilment capacity and improve efficiencies, which our fund manager believes will continue to push margins higher. Additionally, the upside drivers to margins in the retail business are: continued strong growth in advertising (estimate at a 60% plus operating margin), increased use of robotics in fulfilment, and driving increasing prime members to the platform. In our fund manager’s view, Amazon’s retail business has an under-appreciated AI opportunity through retail virtual assistants such as Rufus. Our fund manager thinks that this tool has the capacity to increase conversion for the retail business over time. Finally, Amazon Web Services continues its strong growth and margin profile, with AI related AWS revenues being an important driver of this growth.
Block, Inc
Block, Inc. (new ticker ‘NYSE: XYZ’) reported a mixed quarterly result on 21 February. In Q4 FY24 the company grew gross profit year-over-year by 14% with a 33% EBITDA margin, which was broadly in line with expectations. However, management guided to a disappointing 11% gross profit growth in Q1 FY25. This was below expectations of ~14%. Despite this, they confirmed their full-year FY25 gross profit growth guide of at least 15%, implying an acceleration from the 11% in Q1 to ~20% growth in Q4. Jack Dorsey, CEO and founder, stated clearly that they intend to “double our growth rate”. The share price has fallen ~20% following the result, which was compounded by a broader decline in the stock market (the Nasdaq is down ~10% over the same period). It is apparent that the market does not believe in the implied growth ramp. On a relative and fundamental basis, our fund manager thinks Block is undervalued at a price-to-earnings ratio of 12x.
Block is being valued similarly to payments peers growing less than 5% - Global Payments and PayPal – and valued below Fiserv and Intuit, which are not growing as quickly. Based on this relativity, at 15% growth one could expect Block to trade between 20x and 30x NTM EBITDA.
Other key updates:
The company repurchased a further $183 million of stock, bringing the FY24 total to ~$1.2 billion or about 2.5% of total shares outstanding. Block continues to show operating leverage. 2025 will see less of a ramp in margins as they invest more in the growth reacceleration, but the business expects to produce approximately $2.5 billion of free cash flow in the year.
Rokt
Rokt recently announced a secondary transaction amid strong demand from new and existing investors. The company has signed a stock purchase agreement for ~US$405 million with investors including Tiger Global Management, Square Peg, Barrenjoey and SecondQuarter. Board members including Janchor Partners' John Ho, Terry Bowen and Karen Katz are also buying shares. This agreement values the business at US$3.5 billion.
Rokt has delivered exceptional growth since launching 12 years ago, with revenue trajectory continuing to accelerate – this year achieving 43% growth year over year, reaching US$600 million, with a similar growth rate expected over the next 12 months.
Rokt also announced a US$300 million acquisition of mParticle, a leading customer data platform (CDP), to create an unparalleled offering to unlock real-time relevance across ecommerce, advertising and customer experience. Rokt will double the total investment into the CDP and accelerate innovation and delivery of mParticle's product roadmap.
F1
The Formula One core business continues to perform robustly and in-line with our expectations. The Las Vegas Grand Prix results were weaker than last year, as is typical in the 2nd year of a new race, but came in lighter than we or the company would have anticipated. Liberty and Formula One are making the necessary changes to correct this moving forward, and we feel comfortable that the Las Vegas Grand Prix results will improve accordingly.
Guzman y Gomez
Guzman y Gomez (“GYG”) reported a strong first half FY25 (“1H25”) result on Friday 21 February, with significant growth in network sales and earnings.
The result was underpinned by strong network sales growth in the Australian segment, up 23% to $573.0m, supported by strong comparable sales growth of 9.4% and restaurant network expansion. This was primarily driven by delivery outperformance, marketing campaigns (such as Good Mornings Start with GYG) and strong demand for value menu items (such as the $12 Chicken Mini Meal). Daypart expansion was a strong growth contributor, particularly Breakfast which experienced 19% comparable sales growth in 1H25. Additionally, GYG is benefiting from a sales and earnings uplift from restaurants, which have extended trading to 24/7 (11 restaurants at the end of 1H25).
GYG’s strong trading momentum has continued into 2H25. For the first 7 weeks of 2H25, comp sales growth (Australia segment) was 12.2%. The company expects to open 31 restaurants in FY25 and exceed its FY25 NPAT prospectus forecast.
GYG is currently trading ~45x NTM EV / EBITDA with NTM EBITDA growth of ~40%. This compares with other high growth US QSRs including Sweetgreen (trading at 70x EBITDA with NTM EBITDA growth of ~95%), CAVA (trading at 90x with NTM EBITDA growth of ~30%), Wingstop (trading at 38x with NTM EBITDA growth of ~20%), and Chipotle (trading at 29x with NTM EBITDA growth of ~15%).
Intercontinental Exchange
International Continental Exchange (ICE) is superbly positioned in capital markets, providing an effective hedge to disruptive actions by the new US Administration. 4Q24 EPS grew 14% for a full year record result. Revenues for the year (including Black Night acquisition) grew 16%, with over half of revenues recurring in nature, while operating profits rose 15% for 59% operating margins. Its strength in Oil, Natural Gas and Global Interest rate markets was on display in 4Q alongside its strong cash flow generation; so much so that it will begin share buybacks again this quarter having made significant deleveraging progress for the Black Knight Acquisition. The mortgage technology business (where ICE is leading the digital from analogue shift) is leveraged to mortgage rates and so adds optionality to benefit if there is a fall in long-end rates (something Trump is keen to deliver).
Mercado Libre
Mercado Libre (MELI) is Latin America’s eCommerce and fintech leader listed in the US with a market cap of US$105b. The company operates across e-commerce (MercadoLibre), Fintech (Mercado Pago), Logistics (Mercado Envios), and has its own loyalty scheme (MELI+). The business is supported by an integrated product and services ecosystem and is well positioned to persistently gain share of the retail environment. It will expand its marketplace monetisation through rising penetration of value-added services including advertising and logistics. Its fintech business should grow volumes across core payment processing and mobile wallet verticals, as well as its credit business.
In 2024, the commerce business grew 48% to $12.2B revenues on gross merchandise sold of $52B. Its logistics business added 10 fulfilment centres and 49% of Mercado Envios’s deliveries were completed same or next day. Its fintech business, Mercado Pago, grew revenues 25% to $8.6B with total payment volumes reaching almost $200B, up 34%. While cash flow measures are impacted by fluctuations in credit card utilisation and loans to merchants and consumers, enabling e-commerce at its heart— MELI is a capital light, technology-led company with an innovative and inclusive culture.
Latin America has a population of over 600m, twice the size of the US, with over 200m in Brazil and 100m in Mexico. At the end of 2024, Mercado Libre had over 100m annual unique buyers and fintech monthly active users reached 61m. Ecommerce is estimated to be around 15% of retail sales in Mexico and is approaching 10% in Brazil, with MELI the most used platform. Looking ahead, this penetration is about a decade behind the US and estimates suggest it will grow by over 50% in the next 5 years, giving MELI a vast runway to grow its revenues. MELI’s rich first party data and huge reach puts it in an outstanding position to grow in retail media advertising, a market segment that could more than double in coming years. While around three quarters of Latin Americans have a bank account, under 50% are banked in Mexico. Credit card penetration remains low across the region at 28% and as a leading fintech firm, MELI is improving financial inclusion.
Microsoft
Microsoft remains an exceptional leader in enterprise technology and cloud, delivering compound double-digit growth over time. With significant uptick in capex budgets by the 3 large hyper-scalers evidenced in the most recent quarter, it continues to pursue the long-term opportunity ahead through AI. These large capital needs will weigh on net cash flows in the near term as well as overall returns on capital.
Taiwan Semiconductor (TSMC)
TSMC continues to reaffirm its position as the dominant foundry globally, and now effectively operates as a monopoly in producing the most advanced semiconductors. TSMC’s end market exposure is very broad-based, making it an integral part of the semiconductor supply chain. In the recent quarter, TSMC gave a very positive update to the market that showed the visibility it has into revenue growth for the next 5 years. Specifically, the company lifted its long-term revenue growth guidance to be ‘20%+’ growth over the next 5 years, up from their previous 5-year guidance of 15-20% revenue growth. Within this expectation, TSMC management talked very bullishly about the AI revenue opportunity. Over the next 5 years, the company expects AI-related chip revenue to grow at a mid-40% growth rate. This demonstrates the critical role TSMC plays and the visibility it has into the demand profile of its customers. The company also guided to capex for the year to be in the range of 38-42bn USD. This range surpassed consensus estimates at the time of the result and is an important indicator for the ‘health’ of the semiconductor market.
Zillow
Zillow reported fourth quarter earnings that were initially poorly received. However, Zillow gave important guidance on their earnings call, and set out new targets for 2027, which provided our fund manager strong confirmation of their investment thesis.
Zillow is delivering on its goal to reduce friction for buyers and sellers through a more integrated, digital solution that is driving increased conversions, while at the same time showing strong discipline on costs. The US housing market is at 50-year lows and remains challenging, however, this is not new news— our fund manager thinks the risks are to the upside given the huge and growing pent-up demand for people to move house in the US. Sooner or later, the housing market will unlock.
Zillow increased its dominance at the top of the funnel in 2024 with traffic rising +3% to 204 million monthly average users. Daily app usage is 4x the #2 player. Revenues grew +15% in 2024 compared to the housing market which grew 6%. EBITDA margins expanded 200bps. Zillow had a GAAP loss of -5% in 2024, compared to a loss of -8% in 2023, and is on track to become GAAP profitable in 2025 (the key gating factor for inclusion in the S&P 500).
Zillow generated $2.2bn in revenues in 2024 and has guided to $1.0bn of additional revenue by 2027 as Enhanced Markets coverage expands from 21% today to 75% (in a flat housing market). Zillow expects to add another $500m in rental revenues by 2027, and management thinks a housing cycle turn could add another $1.3bn of revenues. This yields a target of $5bn in revenues by 2027 (assuming mid-cycle), which will likely come through at 40 – 60% operating profit margins. At the low end of this range, this means $2bn of net income which at 25x P/E yields a $50bn market cap target – more than 2.5x the current market cap for Zillow.
The housing market remains challenging. This tough macro environment is making it much harder for Zillow’s competitors, and the competitive moat is widening. A clear example of this is Redfin’s decision to turn over its rentals business to Zillow. This is a great result for Zillow, with a one-year payback, that sets up a head-to-head competition with Co-Star in rentals, which our fund manager thinks Zillow is poised to win. With $1.9bn in cash, Zillow is in a strong position to buyback the remaining $419m of convertible debt outstanding this year, while also executing on its $381m of additional share buyback authorisation. Our fund manager thinks Zillow has given typically conservative guidance for 2025 and expects the company to beat expectations quarter after quarter through 2027 as it executes on the new product rollouts that come through on high incremental margins thanks to strong cost discipline.
