Investor Essentials Daily

Let’s see how activism works for this tech-focused fund

November 11, 2022

In venture capital or seed investments, it’s critical to trust a team and advise them on how to improve themselves and the company.

That’s why money is not the single most important thing a start-up can get from its investors. The situation can be different when it comes to large-cap companies or the ones who already succeeded.

As an investor, if you want to change how a business is run, you need to be an activist. This is pretty much what Altimeter Capital has been doing recently with an open letter to Meta (META).

Let’s have a look at the fund’s top holdings using Uniform Accounting to see if this strategy plays out or not.

In addition to examining the portfolio, we’re including a deeper look into the fund’s largest current holding, providing you with the current Uniform Accounting Performance and Valuation Tearsheet for that company.

Also below, a detailed Uniform Accounting tearsheet of the fund’s largest holding.

Investor Essentials Daily:
Friday Uniform Portfolio Analytics
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For start-ups, there are two essential resources. The first, of course, is money. Without money, it’s incredibly hard to get your business off the ground. The other is vision. Start-ups, especially those with novice leadership teams, often miss important parts of growing a successful business.

That’s why so many start-ups begin with venture capital partners. VC companies provide cash, but they also have experience getting companies to scale.

However, just because companies have already grown, and just because a company has been taken public, does not mean it’s past needing external guidance. That’s why activist investors exist, after all. Companies don’t always make the right moves, and activists and venture capitalists alike can help guide them in the right direction.

One of the great examples of this is Brad Gerstner of Altimeter Capital.

He founded Altimeter Capital in 2008, during the Great Recession, with the goal of helping visionary entrepreneurs build iconic companies, disrupt markets and improve lives through all stages of growth.

The firm’s strategy focuses on investing in technology companies and serving as an expert long-term partner to these companies as they enter the public markets.

This strategy and mission worked very well for Brad Gerstner and he made his name by leading a Series C investment into Snowflake (SNOW) which helped the company go public with the largest software initial public offering (“IPO”) at the time.

However, he recently made the headlines with an open letter to Meta (META) executives, specifically Mark Zuckerberg.

In his open letter, Brad Gerstner criticized the company’s management and advised them to rein in spending and cut headcount costs by at least 20%.

He also called on Mark Zuckerberg to reduce Meta’s capital expenditures and slash its metaverse investments.

Considering Brad Gerstner’s prior investments, strategy, and his two million shares in Meta, the open letter might lead to a domino effect among other investors to take more serious actions in the company’s management.

In this context, let’s have a look at Altimeter Capital’s top holdings and see if this strategy still works out for Brad Gerstner.

Economic productivity is massively misunderstood on Wall Street. This is reflected by the 130+ distortions in the Generally Accepted Accounting Principles (GAAP) that make as-reported results poor representations of real economic productivity.

These distortions include the poor capitalization of R&D, the use of goodwill and intangibles to inflate a company’s asset base, a poor understanding of one-off expense line items, as well as flawed acquisition accounting.

It’s no surprise that once many of these distortions are accounted for, it becomes apparent which companies are in real robust profitability and which may not be as strong of an investment.

See for yourself below.

On an as-reported basis, many of the companies in the fund are not profitable. The average as-reported ROA for the top holdings of the fund is 0%, and only two of the companies, Microsoft (MSFT) and Meta, look like they’re making any money at all.

Once we make Uniform Accounting adjustments to accurately calculate earning power, we can see that the average return in Altimeter Capital’s top holdings is -4%, which shows that the fund’s top holdings are much worse performers than it seems.

As the distortions from as-reported accounting are removed, Uber Technologies (UBER) doesn’t have an ROA of -7%, its Uniform ROA is -46%.

Meanwhile, the data streaming platform Confluent (CFLT) continues on recording losses but Uniform Accounting shows that the situation is getting worse for the company with a Uniform ROA of -30%, not 15%.

Clearly, Altimeter is focused on investing in companies that aren’t making money… but which hopefully can make money in the future.

To find companies that can deliver alpha beyond the market, just finding companies where as-reported metrics misrepresent a company’s real profitability is insufficient.

To really generate alpha, any investor also needs to identify where the market is significantly undervaluing the company’s potential.

These dislocations demonstrate that most of these firms are in a different financial position than GAAP may make their books appear. But there is another crucial step in the search for alpha. Investors need to also find companies that are performing better than their valuations imply.

Valens has built a systematic process called Embedded Expectations Analysis to help investors get a sense of the future performance already baked into a company’s current stock price. Take a look:

This chart shows four interesting data points:

  • The analyst-expected Uniform ROA represents what ROA is forecasted to do over the next two years. To get the ROA value, we take consensus Wall Street estimates and convert them to the Uniform Accounting framework.
  • The market-implied Uniform ROA is what the market thinks Uniform ROA is going to be in the three years following the analyst expectations, which for most companies here are 2023, 2024, and 2025. Here, we show the sort of economic productivity a company needs to achieve to justify its current stock price.

Embedded Expectations Analysis of Altimeter Capital paints a clear picture. Over the next few years, Wall Street analysts expect the companies in the fund to improve in profitability and the market agrees.

Analysts forecast the portfolio holdings on average to see Uniform ROA increase to 10% over the next two years. However, the market is already pricing in a significant improvement in profitability by expecting a 14% Uniform ROA for the companies in Altimeter Capital’s portfolio.

For instance, the general-purpose database platform MongoDB (MDB) recorded a -18% Uniform ROA this year. Analysts think that it will improve slightly to -17% but the market is already pricing Uniform ROA to keep rising to 16%.

Similarly, UiPath’s (PATH) Uniform ROA is -37%, Wall Street analysts expect that the company’s profitability will increase to -13% but the market expects a much better improvement in profitability to 8% Uniform ROA.

Overall, Altimeter Capital’s top holdings have quality names that can deliver high growth, but the current situation of the portfolio might be concerning for its investors considering rising interest rates and inflationary pressures. Also, valuations are highly crucial when investing in growth companies.

This just goes to show the importance of valuation in the investing process. Finding a company with strong profitability and growth is only half of the process. The other, just as important part, is attaching reasonable valuations to the companies and understanding which have upside which has not been fully priced into their current prices.

To see a list of companies that have great performance and stability also at attractive valuations, the Valens Conviction Long Idea List is the place to look. The conviction list is powered by the Valens database, which offers access to full Uniform Accounting metrics for thousands of companies.

Click here to get access.

Read on to see a detailed tearsheet of one of Altimeter Capital’s largest holdings.

SUMMARY and Uber Technologies, Inc. Tearsheet

As one of Altimeter Capital’s largest individual stock holdings, we’re highlighting Uber Technologies, Inc.’s (UBER:USA) tearsheet today.

As the Uniform Accounting tearsheet for Uber Technologies, Inc. highlights, its Uniform P/E trades at -52.5x, which is below the global corporate average of 17.8x, and its historical average of -24.5x.

Negative P/Es only require low EPS growth to sustain them. That said, in the case of Uber Technologies, Inc., the company has recently shown 12% Uniform EPS shrinkage.

Wall Street analysts provide stock and valuation recommendations that, in general, provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Uber Technologies, Inc.’s Wall Street analyst-driven forecast is for EPS to grow by 92% in 2022 and shrink by -110% in 2023, respectively.

Furthermore, the company’s return on assets was -46% in 2021, which is below the long-run corporate averages. Also, cash flows and cash on hand consistently exceed its total obligations—including debt maturities and CAPEX maintenance. Moreover, its intrinsic credit risk is 52bps above the risk-free rate. Together, these signal low credit risks.

Lastly, Uber Technologies, Inc.’s Uniform earnings growth is above peer averages, and below peer valuations.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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