Interview. Hedge Fund Manager's Top Investments with Hayden Capital's Fred Liu

(upbeat music) Hello and welcome to the Synopsis, a podcast for professional investors. My name is Drew Cohen and I'm really excited for today's interview, which is gonna be with hedge fund manager of Hayden Capital, Fred Liu. Fred, welcome. - Thank you Drew, I appreciate it. It's been a couple years in the making here, so I'm glad we finally had a chance to do this. - Yeah, and I'm really excited to talk to you too, because you invest in a lot of interesting businesses. You'll take relatively concentrated positions too, and we'll talk a lot about different stocks that I think a lot of our audience would be interested in, but just to kind of kick us off, why don't you say a little bit about your investment philosophy? What kind of investor are you? - Sure, I would say that our specialty is really within the tech space, and we invest globally. We hold a very concentrated portfolio about five to 15 names, and we're really looking to compound our capital alongside of these businesses as they become more valuable over time, and the best proxy for that is probably free cash flow or earnings growth over time. And so we're really looking for companies that can 3X or 5X, their earnings power over a decade plus. And hopefully buy these businesses at a fair-to-cheap valuation, and really compound our capital alongside of that growth. I would say where we really started was in US and Indonesia about 10 years ago, and especially on the consumer internet side, and our core at the time was probably e-commerce business models. And since then, we've both expanded industry-wise into consumer entertainment, fintech, with this lead to software drawdown, we've started to understand, get up the speed on software a little bit more, and then geographically, historically, if you're going to invest with businesses for a decade plus, especially within tech, a lot of these businesses change over 10 years. You think about what Amazon looked like 10 years ago versus what it is now. It's a completely different business with multiple different segments. What doesn't change is really the founder and the culture that they instill in these businesses and how they really direct their teams to make decisions. Traditionally, we found the best entrepreneurs in US and Asia, and that has started to expand outwards as well. We started doing a little bit more Japan and a little bit more Latin in the last couple of years. - What are a couple of those entrepreneurs that you really like? - Yeah, I'm sure we'll touch upon it soon, but we've been long time investors in C-limited. It's been a volatile stock, but I really admire the business that they've built over the last 10 years or so. We've been investors for about eight years at this point. We're really looking for owner operators who are not afraid to make call like against the grain decisions that may be professional boards or professionally run management teams might be a little bit more hesitant to make. These are businesses that can pivot quickly, react quickly to changes in the market, launch new businesses even though it might temporarily depress cash flow for a couple of years to really try to capture and have greater odds of achieving a much bigger pie in five to 10 years. That's what we're looking for. - Okay, so that would be for us Lee for C-limited is one of those entrepreneurs. Do you find a lot of similarities between all these entrepreneurs you're looking at or is each one kind of different? - I mean, they're all different in some sense, the background and the skill set that you need to build these businesses is very different. Some may have worked at large firms or venture capital or another large corporation before and some of the companies that we own, they were started straight out of college, right? And the founders have never had any professional management experience before. So I think it really differs, but the skill set that we're looking for or more of the personality that we're looking for is someone who is willing to think outside of the box and disrupt the status quo. And in order to do that, especially in, I'd say like more conservative cultures, like some parts of Asia, that's actually, if you find a person like that, that's actually a really good signal, right? Because they're going against the grain of what society has kind of, yeah, traditionally taught you what success is. And so finding these entrepreneurs and these type of geographies is really, yeah, you probably have greater odds of finding something differentiated there and them having greater chance of being able to disrupt the incumbent industry. And I want to highlight something you mentioned on the intro, which is that your positions will be anywhere from five to 15. So five is not very many positions for an investment fund. So that is a very concentrated portfolio you can be running. So how do you build confidence in that? And how do you also just withstand, I would imagine, what must be pretty high volatility? - 100%. I mean, look, we're investing in what I would call like emerging tech businesses or emerging compounders. Number one, it's one sector. And number two, it's a highly volatile sector because at the point that we're investing, generally these businesses are like one to 10 billion dollars at market cap, they're still relatively small, largely ignored by the street, haven't been included in indexes, so there's no natural buyer. And more importantly, on top of that, these businesses were probably found during the last five to 10 years. And so they're relatively newer businesses. Earnings stability has not been achieved yet. Earnings are still volatile and these businesses are still evolving and they're still investing in new things. And so what actually drops at EPS and steady state margins, it's not showing up in the financials. And oftentimes they may have a core business that's really reinvesting into a brand new business. And the core business might be say 30% margins, but they're reinvesting all that cash into new business. And so it doesn't screen well either, right? It looks like it's trading out like a hundred times earnings. And so yeah, because of that, definitely a more volatile portfolio. And so all of our partners need to understand that. And be comfortable with that. And then on top of that, I would say like our portfolio really follows a power law type of dynamic. And I think you can see this among like most investors, like whether it's Berkshire Hathaway, top couple ideas that they've had or positions that they've had have really generated bulk of the returns over the last couple decades. And you can see that with similar other funds to regardless of strategy. And so our portfolio, I've given stats on this in our letters before over the years. But basically the top 20% of ideas generates all of our alpha. And the other 80% kind of just nets out. We don't tend to lose much money on our losers, at least from a total NAF perspective, because of how we structure the portfolio, which is when we're buying an earlier stage company where our conviction is still loosely held. We're still looking for data points to go to corroborate our thesis. These businesses are still are gonna be very small. They might be like tracker positions at less than 2%, or it might be like a smaller core position at 5%. But very similar to let's say like a growth equity portfolio where you're looking for certain KPIs to prove that your thesis is on track. And as you hit different metrics, or you hit those KPIs, and it proves that this is actually trending in the correct direction, you're probably gonna top up and add more money. Because the odds of them achieving that 5X EPS growth in the next 10 years has just increased, the range of outcomes has narrowed. And so your downside case is probably no longer in existence and expected value has moved up. And so even though their stock price has maybe moved 10%, maybe your EV has gone up 25% on that data point print. And it kind of proves your thesis is on track. And so we're gonna continue to add on to these. And so newer positions are gonna be about 5%, but obviously a much wider range of outcomes. And range of uncertainty there. And our core positions are gonna be 10% plus and our larger positions that have kind of grown into it that we just allow our capital to continue to compound alongside of them. They're gonna be called mid teens to like 20%. - And as those stocks assuming you're successful and picking on continue to grow, would you ever trim that or are you fine just letting that continue to become the larger portion of your portfolio? - Yeah, I think it depends, right? I wish I could draw something for you here, but basically I think over time, 10 years ago, my thesis was that we're gonna buy earlier stage businesses that have greater earnings variability and the market is not confident in what the business model ultimately looks like. And if we can get greater data, whether through channel checks, all data, et cetera, to really underwrite what the incremental unit economics look like and gain confidence in that before the street, we can buy these names at a very cheap price because the market is discounting them. And over time as earnings kind of proves itself out, growth maybe these earnings grow 30%, 40% cagars in their early years, and then the variability of earnings also decreases, you should get a higher multiple as well as the market gets confidence around it. So not only do you get EPS growth of called like 5X, but you also get multiple expansion of maybe 2X and that's how you get a 10-bagger, right? That's historically how our portfolio has been structured, but also I think markets have also changed a bit in terms of there's more volatility in hair and a markets. When you see names like Netflix that are several hundred billion dollars swinging 40% in a couple months, I think there's this less long duration capital out in the markets today. And so, So because of that, our portfolio may swing, the stock price path may be very volatile. And at a temporary peak, it might be like a 15% kicker IRR. At the bottom of that trough, in a drawdown where we are today, maybe it's like a 30% IR. But that fair value of that business, we're still underwriting to say 20% or 25%. But that 15% at that temporary peak is still greater than what we think the general market will achieve. Let's call it like, has MP has historically done about 10%. It's still better than what the S&P returned is, right? Historically we probably would have just continued to keep it and accept the volatility. But I do think that markets have changed a little bit. And so we're starting to think if there's maybe a little more alpha by being tactical around it. And being able to understanding that market's a more volatile, I'll probably get a chance to buy it back when it's about like a 30% IR at the bottom. So our thinking around position sizing and trimming has changed a little bit. But in general, we're hoping to own these businesses for five to ten years assuming IRRs don't get too compressed here. So if I had to paraphrase what you were just saying a little bit, you're kind of saying that you want to increase your hurdle rate because you've noticed how volatile these stocks can be. Yeah, that's correct. We're still exploring that right now. And so I can't promise that there's going to be any drastic changes in our portfolio over the next couple of years. But I just think that there's probably a bit more alpha that we can squeeze out given the change in the way that markets react especially in our sector. Yeah. And then kind of zooming out a little bit just overall your investment strategy seems to be this idea that there's a lot of these emerging companies with will say a large probability distribution of outcomes. But you believe through superior interest and also just the fact that a lot of investors aren't really looking at these businesses that much. They're not doing very deep deep research on them. You can gain higher confidence that this probability distribution, it's narrower than what other people expect. And so those are the kind of opportunities you find to be attractive. Yeah, 100%. Or even if the market is pricing a range of outcomes, that's very, very wide. Maybe we don't have any differentiation on how wide that range of outcomes is. But because of market volatility and it might be a new IPO, it might be a billion dollar company that no one cares about, et cetera, the market is pricing it almost at the bottom end of that range of outcomes. And so it's almost all upside, right? If something good happens that is unexpected, that is not pricing the stock, the stock is inevitably going up. And so we protect the downside in multiple ways. These might be earlier stage businesses and they might be more volatile businesses. But we're almost buying growth at a value price when we buy these businesses. And one example is, for instance, if we're buying it at the bottom of that range of outcomes, there's very little chance for that business to lose money because not much expectations of pricing it to that stock. For instance, one company that we're looking at in LADAM right now, it's priced at six times earnings and growing earnings 80%. Right? And it's a billion dollar company and trades only a couple of million dollars a day, so there's just not much interest in it. And so I think that's why the market is kind of mispricing it. But another case might be a lot of our winners have come from a core business subsidizing a new business, where if that new business is successful, it's going to 3X, the entire size of the company or the value of the business. So one example might be like C-limited back in 2017, 2018. They had a gaming business that was doing 400 mil of EBITDA. We bought the business at about four billion dollars, so 10 times EBITDA. And the street hated it because they were reinvesting all that cash flow and more into an e-commerce business. It was very nascent and number two player behind Lazada, which being backed by Ali Baba, and everyone was like, why does a gaming company have a right to win? But in that case, let's say you knew nothing about e-commerce business, but you knew that this team wasn't dumb, right? They weren't irrational. If the e-commerce business didn't work, they could always shut that down, right? And the gaming business itself was continuing to grow at a very high clip. And so that 400 may have been 600 in a couple years as well. And so it's very hard to lose money on something like that. Another example might be we invested in after pay in 2019, and everyone was like, what is BNPL? Why are they spending so much money on the US, etc? But if you actually studied, they're all Australian business, and they had been listed for many, many years on the Australian exchanges. I mean, it was a 30% margin business in Australia, and also growing in the mid-20s, right? But they saw the opportunity in the US, and the US is a market that's 10 times as large. And when we did calls with merchants in really understanding why our merchants are starting at the except BNPL, what are the conversion rates, how do conversion rates differ than credit cards, how does it bring in a completely new set of customers to them? It was the exact same commentary that we heard from US merchants as Australian merchants. And so we also saw in the demand side that people were downloading the app and using the app. And so you kind of knew that consumer demand was there, and you could understand why people would use a product like this. And so it's like the US seems like a very high odds chance of succeeding. And if it does succeed, it's going to be 10X the business of what the Australian business used to be. But the stock was being priced around like 20 times earnings or so just on the Australian earnings alone. And that was already a proven business. And so, again, I think our downside was protected because even if the US business didn't work, they could shut that down and you would still have value in Australia. And I don't actually disagree with what you're saying, but I'm going to push back anyway. I think one of the reasons maybe why investors don't like those opportunities is because if it doesn't work, it kind of suggests that maybe management is not going to be allocating capital well. Also, if it doesn't work, maybe they're going to double down, put even more money into it. Because there's not that many examples of an entrepreneur saying this doesn't work, I'm going to shut it down. That's it. And I'm not going to keep going into these other bets. I always make the argument you're making when I'm talking about meta where I say, reality labs doesn't need to work if it's not going to spend $20 billion a year forever. That's Mark. Eventually he's going to shut it down or it's going to work or it's going to break even. But you shouldn't be putting that in into your multiple because then you're basically implying they're losing that money forever, which is the point you're making basically. And I'm trying to argue, well, maybe sometimes these managers suggest that they are going to burn money in all these different areas and maybe they're not that great at making money and at the time, if we're talking about C limited, and you could correct me if any my knowledge here is wrong. But forrestly, really, he had this partnership with Tencent. They were building, you know, they had internet cafes and, you know, they had a little bit of success with C money, but it wasn't that big. It was more about just an enabler to getting people to pay for these video games. And then, you know, they acquired free fire. That wasn't a game they actually built themselves. It was acquired from some Vietnamese studio, I believe it was. And so they never had this big history of building these big businesses. And so what right do they have in order to, you know, think that they're the ones to be able to do this? Yeah. Look, that's number one 100% fair point. Number two, I think most management teams are empire builders. They're not actually rational, right? They're here for ego. They're here to, you know, grow revenues. They're here to build as big of a business as they can in management as many people as they can. You know, I think the companies that you want to invest behind are, you know, those who are more rational capital allocators and are not afraid to call quits on something that is obviously not working. And, you know, since you bring up C limited, I would say, you know, a lot of people in the market definitely hated that they went into like India and Eastern Europe, you know, a couple of years ago. But our understanding and, you know, we had heard this directly from the team was that they saw an opportunity to basically spend a couple billion dollars, about four billion dollars in each of these markets to create 40 billion dollars of value. And they had historically, you know, they had already entered Brazil a couple of years before that. And they had done it in Southeast Asia as well. GDP of these regions were roughly the same. You know, GDP per capita was roughly the same, e-commerce penetration, roughly the same. So they experimented in all these markets, right? But very quickly when they, you know, needed to rationalize a little bit more quickly than they had originally anticipated, they shut down Eastern Europe and they were not going in India as well, right? And so they were not afraid to kind of make that pivot really quickly. And so even though the market hated them and punished them for that, we actually viewed that as a positive because this kind of proved to your point that this team is not completely irrational and just going to come spend into oblivion, right? Yeah. Let's talk a little bit more about C. So they, you know, started in Southeast Asia. That was their focus. As you mentioned, they, you know, started in video games. That was kind of their cash flow. They also had, you know, see money for financials. That wasn't huge, but it was part of kind of enabling the video game business and then they got into e-commerce. But correct me if I'm wrong, this was around 2014, 2015, somewhere around there. There was a lot of competitors in e-commerce. They were not a first mover. I know there was a lasada that you mentioned, which was owned by Ali Baba. I believe there's also Toco, Tocopedia. I think GoJack also kind of had its own GoJack and Grab both kind of had their own commerce offerings as well. And I'm sure there was a bunch of other little ones too. So if you're looking at this at the time, and I don't know exactly when you got involved in C-limited, maybe that'd be helpful to this answer, but at what point can you actually gain confidence that this isn't just another one of these e-commerce marketplaces, but I actually think they have a sustainable competitive advantage here. >> Yeah, so if you go back to like 2018 when we first invested, you know, Shopee had already been around for roughly two years or so. >> Sorry, Shopee is the name of their e-commerce platform if people don't know. >> Yes. >> And I think what's interesting is, like we had studied e-commerce extensively before, and you know, if you were building an e-commerce business from scratch, what would you want it to look like? Number one, you would want it to be mobile first, because a lot of the population in emerging markets first experienced shopping online for the first time through a mobile phone versus desktop. And the reason why that matters is because if you came into existence in a desktop world, your website and user experience is gonna look very, very different. On a mobile phone, there aren't really many apps. Your apps need to be lightweight. The app needs to be more engaging, it needs to go through multiple verticals. And it's the reason why, for instance, super apps are more prevalent in emerging markets versus say the US, where you have apps that dominate each individual vertical. It's because on a desktop, it's very, very easy to switch between tabs and switch between websites. Versus in an emerging market, you might be on a hundred dollar Android phone, you just don't have that much memory and that much space on your phone to download a lot of heavyweight apps. And then number two, because it's very hard to switch between apps to price, compare, and et cetera. So you're gonna see a higher prevalence of super apps and also apps that dominate multiple industry verticals for that reason. So you wanna go mobile first, that's number one. Number two is you probably wanna go long tail. You wanna go after categories that are hard to price compare and are not as commoditized. So what I mean is like brand-of-products, right? Like a Dyson hairdryer is going to be the same exact product no matter what website you go to or like laptops, et cetera. These are thin margins, high-value products, need a lot of trust with the consumer. And also it's commodity, commoditized, right? But if you're talking like unbranded clothing or beauty products or home goods, these are all completely, it's called unique to the platform. It's very hard to price compare. And if you can build your app in a way that is engaging and get people to continue to come back to that and spend 30 minutes a day within it, you naturally don't need to reacquire customers, right? And so the difference between what Shoppy had built in the early days versus Lazada and Tokopedia, is that Lazada and Tokopedia really started off in electronics in a desktop world. Tokopedia was started in like 2009, for instance, right? That was a very much desktop-based world. And Lazada's first product they ever sold was a laptop, for instance. These are products that are more male-heavy, more branded items, heavier value items, and lower margins. Shoppy went the complete opposite direction. They went after fashion and beauty and like uncommoticized low dollar value products first. And what was unique was that their female to male ratio of shoppers was much, much heavier skewed towards female versus the other two platforms that I just mentioned are much more male-oriented. In addition, why that matters is that if you're building an e-commerce platform, what matters is like, you need to build trust with the consumers and you need like density of reviews. And female shoppers, for whatever reason, is that they actually leave much more detailed reviews on these products. I remember at a shoppy seller day, they literally gave a slide of why you should go after female shoppers because they'll write like two paragraphs of why this product is great. And then compared to the male review, might be like, a plus great product, right? Doesn't give you much info, especially as an early platform. So that's what they did, right? And what we saw was like, people were spending 30 minutes to 60 minutes a day on this app, right? On a shopping app. And especially in emerging markets where more sophisticated forms of entertainment are not available, right? It's why if you go into rural Vietnam or Indonesia, people are just scrolling on their phones or even rural China, right? You're scrolling on your phones all day and shopping is a form of entertainment. You can't really do that with a more desktop-oriented boring app, right? Like Amazon or something else. And so that's what originally attracted us to it. We thought it had the ingredients to make a very sticky platform. And it very much followed the model of both Ping Do Do and Talbao and China and what they got, right? So we could see like early signs of what led to their success and shopping was starting to adopt the same things. And that was the original ingredients. But as we gained more conviction, what we heard, for instance, was talking to Lazade employees. I would like go to like Kuala Lumpur and go meet them, some middle-level employees. And they were like, number one, Lazade was a mess culturally, because they used to be a rocket internet company. It was sold to Ali Baba. Ali Baba tried to like centralize management. The CEO was sending emails and Mandarin and like employees on the ground were like trying to translate it with Google Translate. It was just a complete mess culturally. And then number two, what we heard from Lazade employees was like, I literally asked them, like, what do you own personally in your personal portfolio? I just remembered this moment distinctly because it was in a cafe in Kuala Lumpur in a mall. And they were like, yeah, we own Shoppy. We don't see limited as our largest position. I'm like, why? And they literally said, because whenever Lazade launches a new feature, like we might be the innovators on it, but Shoppy is going to copy that within two weeks. And they're going to do it three times as better. Like three times better, right? And it's like there's no real moat to like e-commerce. And especially in early days, when all these platforms are still pretty amazing, and e-commerce penetration was like 5%. But there is a moat to execution, right? And moving quickly and acquiring users and getting them addicted to your app and locking them in. And that's what Shoppy did really, really well. Yeah. So I want to paraphrase a couple of the things you said there. So low order value was a big one. That meant that people could shop more. So then you could get like a higher purchase frequency. They gamified the app. It was more entertaining to be on the app. It was built for a mobile phone in an environment where people kind of had cheaper mobile phones. It wasn't a very heavy app. So part of that's the web engineering of that. And then maybe we could also add another element to the fact that in addition to it being female shoppers, who I know forcibly would say are like the taste makers. It also means that when you're shipping something like clothing, you don't really have to worry about it being damaged. It tends to not be a very high-sensitive delivery item. You don't need it like tomorrow. So people are more patient with it. And so all of that kind of helped them build a foundation. And then from there they were able to continue to grow. And I can understand all that in the initial stages where you kind of see it getting a little bit of momentum and all that. But to your point, you're still talking about a company that has low e-con penetration. You're talking about still going up against Alibaba. There is still Tokopedia. There's still this option. I at least I kind of vaguely remember, grab and go, Jack, we're saying, maybe we'll get more into commerce. And they had pretty popular super apps depending on what geography we're talking about and how hard would it have that been for them to add different e-commerce options in there. And then what is the real moat at that point? Because ultimately an e-commerce company, it needs to have a large amount of merchants on one side, consumers on the other side. And until it really gets to be so formidable that other people don't really want to try to crack that network effect, there's not a lot of moats in these businesses. You don't have anything like prime either, giving lock-in. And so at what point in this investment did you really gain confidence in it? And maybe it started as one of these smaller kind of positions. But at what point was it, I really have a lot of confidence see limited is going to be the dominant platform in Southeast Asia. Yeah, I mean, it really started at low single digits, 2, 3% position. And it's become our largest at 20, right? Over time. And what year was that? That was 2018? Yeah, when we first invested, was 2018. And basically, we top up along the way, right? As I mentioned before, as they hit certain KPIs. And so certain KPIs might be, when you're building an e-commerce platform from scratch, you really need to focus on the supply side. Because a variety of suppliers and a variety of products are naturally going to attract buyers. And so you don't really need to spend as much acquisition cost on the buyer side. What you really should be spending is on the supplier side. And so what we wanted to see was variety of suppliers across each industry vertical. And we were like, web scraping this stuff essentially, comparing it versus other platforms. We're comparing price and number of merchants in each category. So when we started to see that density exceed like La Zada and Tokopedia, that's really when it started giving us more conviction. That something is working here. In addition to that, not only do you want to see variety of suppliers increase, but you also want to see order frequency, right? Because the more times a shopper orders on your platform, the more addicted they are, and the more they have mind share. Because, like I said, these are low-end smartphones in emerging markets. You don't have very many apps installed. And so if shoppy is one of three apps that's on your phone, like you're going to naturally click that first to see what products are available if you are bored and just want shopper payment or to buy actually buy something. And so what we wanted to see was order frequency reach almost China type levels. And so when we originally invested, the average shopper was buying about two times a month, but you know, Lazada was like once every couple months. And the reason was that, you know, a lot of the mail shoppers, like I said, they started off in electronics. It's where they really had their like brand brand around a mine chair around, you know, you're not going to buy a new laptop, you know, every couple months, right? You're going to buy maybe once every couple years, right? And so they didn't really have the mine chair with the customer. And so what YC being so addictive was valuable and getting people to spend inside of app was because they could lower their customer acquisition cost and then keep people coming back to the app for free and build it that way. And so when you saw time spent increase and also order frequency increase to start approaching China levels, we were like, okay, something's working here and people are starting to get addicted to the platform. And so it was once you started seeing those metrics, that's when you took the position sizing up even more. Yeah, definitely. And it happened really quickly because like order frequencies went from like two to four, like within two years, essentially. And so you could see. Was this during COVID? It even happened before COVID, yeah, like late 19. Okay. Yeah, it's interesting when these e-commerce companies are late comers. And I'm thinking of Kupong too, who we've talked a little bit about where they showed up really, it's getting into the first party and trying to become this full chain platform e-commerce logistics experience. Really in 2017, kind of 18. And now they're the most dominant player less than a decade later, whereas we're kind of used to carrying the story of Amazon, starting the late 90s and taking a long time to build that position. And it's just kind of interesting how a lot of these markets are a little different. And I did want to touch a little bit on the Chinese e-commerce market in specific because we are talking about these different e-commerce players. And another really interesting one is pin walled wall, which I know you've invested in the past, you don't currently hold it. But that was a very interesting business because they totally displaced in an incumbent, which many people, at least from the outside world living outside of China, would have thought Alibaba had a much more dominant position than pin walled wall exposed them to have. So I'm just kind of curious what your thoughts are on. I'm forgetting his name if it's Colin, something Colin Huang, who's the CEO of that business, or was. And he kind of built that to really displace Alibaba. What did you see in that investment that really attracted you to it? Yeah, well let me take a step back too because let me address the Amazon thing. Because every time you see Amazon announced that they're going to enter a market, stocks in that sector are like down 10% because everyone's scared of Amazon. But if you actually look at what Amazon has done globally, they've tried to go global for so long. They've been in Brazil for like what 14 years at this point. They have, you know, a presence in Singapore. They tried to enter China, etc. They have failed in every single market globally, outside of the US and maybe a little bit in Germany and a little bit in the UK, right? But in most markets globally, they haven't done a good job. And the reason is that in a lot of these markets, you know, GDP per capita or income levels are much lower. And so the things you prioritize are different, right? And so Amazon is known for logistics, you know, trust high quality items and, you know, quick shipping speeds, right? And a lot of these markets, if GDP per capita is $5,000, you know, your disposal income really isn't that much. What you really care about is price more than delivery speed. And you care about shopping almost as entertainment in a form, right? And you want to go after low AOV products, which again, is hard for Amazon to justify, you know, same day or next day shipping on, you know, a $2 item, for instance, especially in these markets. So I think the way that you need to build for these different markets, the business model that you approach it from is going to be very, very different depending on GDP per capita. You know, when did this country kind of enter the online commerce phase? Was it through desktop, through mobile, what are consumer habits, etc. And I think to your point about, you know, ping do dole kind of being like a second mover, I actually think it makes sense. Every single business that they've entered, they have never been the pioneers. They have always been the fast followers and copiers. And the reason why it's beautiful is that, you know, when you are developing a new product or a new business model for the first time, you don't know how consumers will react to it. You don't know if consumers will like it, you don't know how much on average are they going to spend, you know, for every order, you don't know how frequently they're going to order, etc. So they actually let other startups spend that R&D and testing money first. And then they see what works, what doesn't, what are the mistakes that they made? And in China, especially generally you have like dozens of these startups, VC back just burning cash, it to kind of find a business model and spend their way into a business model. And then when these companies start to, you know, run out of cash and go bankrupt, etc, PDD will come in, learn from all of their mistakes, and then enact the business model that actually was proven to work and then spend that capital more efficiently. And especially in earlier stage businesses, let's say you have like 1% penetration of a market, right, of the total dressable market. That's not very hard to overcome and to catch up on, right? If you own like 50, if an incumbent owns 50% of a market, then yeah, that's going to be very, very hard to overcome with just capital. But if you're like 1% penetration, all these startups are out there, you know, trying to find a business model, that's very easy for PDD to catch up on just by spending money. And they can spend that money more efficiently than if they entered first because they learn from all the mistakes of others. And so what's interesting about PDD also is that they started in what I would call like a gen, they're a gen 2 company in China. So gen 1 would be like your 10 cents buy dues, hollybobbles, right? Starting a desktop world. PDD really started about 10 years ago in a mobile world and where we chat was already starting to proliferate and social messaging was already starting proliferated. Then, you know, they got an investment from 10 cents that really helped them to jumpstart the traffic. Basically, 10 cents fed them a lot of traffic into the PDD app. But basically, they entered by attacking a market that none of the incumbents had actually focused on, which is lower tier cities and households that don't make as much money. So in real parts, you know, Shanghai in 2018, GDP per capita, it was around $20,000, right? You're starting to reach like, you know, career levels at that point. But, you know, if you go to like tier 3 and more rural parts of China, GDP per capita was $5,000. And so it's a 4x difference, right? The type of platforms that people are attracted to in Shanghai versus like lower tier cities, very, very different. In addition to, like I said, the same things about, you know, first experience with mobile shopping or online commerce, lower end smartphones, less entertainment options. So you use shopping as entertainment essentially, an infinite scroll. And PDD really attacked the 600 million people that were living in like what I would call like, it's almost like a different country, right? Then tier 1 cities. It's a completely different country and different culture and different like purchasing power. And so PDD really catered to this segment of the market that no one else was present in. And because it's very hard to, you know, ship products within two days to the countryside of China, they went after categories where, and had AOBs where people didn't care to get products in two days, right? They were okay with waiting a week or two weeks for these products. On top of that, PDD had a model where, you know, because these households have lower discretionary income, they really care about price. Well, how do you make price more efficient by going direct to the factory? And if you, you know, China is basically the manufacturer for the entire world, there's a lot of factories in the country and a lot of these factories do not run at full capacity. And so PDD came up with a model of let's kind of only be like Costco, like aggregate demand. In a sense, what they do is what it's called C to M like consumer to manufacturer. So on the app, if you actually go on there, it's almost like an infinite scroll, what I would call like almost like a sushi conveyor belt. The item is not going to be on there forever. It's going to be on there for maybe like a couple days, a week, two weeks, etc. until they run out of inventory. And then if it's gone, it's gone forever. Right? And so it encourages you to order first. And they started off with a group buying model also, which was you had to get like say a hundred people to buy together it before, you know, the order can be made essentially by the factory. And so they would aggregate all these orders and then present this bulk order to the factory, which would then make it on the spot. Right? And because they were bringing demand to the factory, number one, factories knew exactly how much quantity they need to make. So there's no risk of inventory risk, right? There's no risk of like making too much and they have in the market down. Number two, some of these factories might be operating at like 50% capacity. And so if you're operating at 50% capacity, you know, you're going to be willing to accept the price that is higher than the average variable cost of producing that good, but probably lower than average total cost, right? Like factoring depreciation, all of that. And so they were able to kind of, you know, cut the middleman and also get a lower price for that reason. Catering to more rule consumers that were more price sensitive and didn't care about shipping times. That was the real wedge here. Yeah, it's interesting because I almost want to make the claim that you can't learn anything from, you know, of this situation where we want to look at different examples and try to extrapolate out broader lessons. And I don't know what the broader lesson here is because there's a lot of idiosyncratic things at play. You have a different sort of commerce model that you mentioned, community group buying, which means you need to get 100, sometimes 1,000 people to purchase something in order for the deal to become valid. That business model existed before though. That's what Groupon essentially was. And that business model did not work in the United States or elsewhere. You had other sort of e-commerce sites in the past where they would sell directly to consumer from manufacturers. That's kind of what Overstock was in a way. So all of these things kind of existed before, but it just was the right mix, not the right time or not the right execution where you did have now a player who was able to put community group buying together. Another key part of that was the Tencent Partnership you mentioned where if Alibaba, they did try to copy with their own community group buying app. But funny thing, if everyone's on WeChat or WeChat, and you try to share a link for Alibaba, it's gonna blow up the link and it's not gonna be clickable. And so you won't be able to actually effectively access the consumers. And that's like a very one off kind of idiosyncratic thing for that market, whereas the same game played again where everyone was on WhatsApp or I message, I don't know if you would have seen the same result in the same time period. I also know you're kind of talking about the different sort of purchasing habits. I know a lot of the initial sort of sales on Pindwald Wall was fruit, where those manufacturers would actually be farms and they were now able to reach out to consumers for the first time ever and sell directly. I don't know that we really have something similar to that in the US or in some other countries. And part of that too, it goes back to also now the logistics network that you're talking about. Is it more expensive or cheaper to ship something in these different markets? And China in specific, if you're thinking about an e-commerce company coming up late, there was no e-commerce company that had kind of total control over logistics, right? Because Alibaba, who at the time was the most dominant, they created something called Sineau, which actually helped enable all of these third party logistics companies to be on a unified platform and made a lot of them stronger. But it also meant that they could go to competitors and take sales from other people because JD.com at the time who did try to do the full chain e-commerce logistics sort of play, they weren't anywhere near as big. And so that meant that Pindu-A-Dua had a existing logistics infrastructure could sort of piggyback off of. And so all this leads me to wonder, like what is the real lesson here for investors? I guess you could say just 'cause you're dominant, if you come up with a new sort of mouse trap, you could still, you know, displace in a existing incumbent because the second act of the story is that they now do a lot more of kind of the traditional e-commerce stuff. You don't need to do the group buying anymore. You could just buy a lot of stuff and it's kind of a normal e-commerce experience as well if that's what you want. So what are, what lessons do we take away here? - Yeah, I mean, I guess number one is that they actually didn't directly go against the incumbents in the early days, right? Like I said, they went after like more rural areas of China where Ali Baba or definitely JD was not serving them. And so they went after a completely brand new set of consumers and, you know, through circumstance of history is at this point in time, these users were also logging onto WeChat for the first time and sharing links and, you know, sharing cool things that they find online and a big part of that is sharing deals that they found. I'm Pingdoldo. And so that virality definitely helped jumpstart that business and you couldn't replicate that today, absolutely not because you don't have hundreds of millions people experiencing, you know, the mobile phone and mobile internet for the first time ever, right? And getting excited about it. So no, absolutely. I would say like, but they did do something smart which is going after a market that no one else did and kind of have that viral effect which allowed them to gain to a large enough scale nowadays to now start attacking the incumbents. And I would say they really just started going after the incumbents a couple of years ago, yeah. - Yeah, so it's also a little bit of disruption theory, right, where you started the low end, so unprofit market for others, if you can make it work, then it's a lot easier for you to move upmarket into other adjacent cities. - Yeah, and a lot of venture capital is talk about how they missed Pingdoldo. Precisely because they lived in geographies where like they didn't know anyone who used it, they didn't use it personally. Like it's not a app designed for like a Shanghai resident, or a Shenzhen resident, like, which is where most venture capital is set, right? And so a lot of people kind of downplayed that business and didn't give it enough credit in the early days for that reason too. - Okay, so why'd you decide to exit that position? - Yeah, well, look, the business has done extremely well. We bought it with a very specific thesis, which is we thought, we bought this in 2022 when the world hated anything China tech. A lot of Western funds were forced to divest, Chinese holdings. And what we saw was a business that was highly cash flow positive, growing at the time, 65% year of a year. And they had substantial cash on their books, and we thought that within a couple of years, they would have more cash on its balance sheet than the entire market cap. By the way, we bought this around like $35, $40 billion market cap. Today they have over $50 billion of raw cash sitting on their balance sheet, right? So that's a very, very different thesis, right? And we bought it at call like 10 times price to free cash flow, and we thought free cash flow would just explode. Because if you look at sales side consensus, sales side was basically modeling like seven billion profits like flat line without any growth attributed to it. And we were like, okay, the street office, he doesn't know what's going to happen to this because one way or the other, it's going to go up or it's going to go down tremendously, right? Depending on what you believe. It's not going to remain flat. So we bought it with that thesis in mind. We thought that community group buying would soon become profitable and they're generally break even at this point in time. And there are the fact of winners at this point because all the other competitors have left. And we said, this is actually a really interesting business that we think is going to be highly cash flow positive. And even though the management team doesn't give much disclosure, like you can do enough work to understand this business is real, and that there is a huge segment of the population that finds value in it. And it's at a cheap enough price that it's almost like a net net at that point. So that's why we bought it. Our stock, we bought around like 40 bucks and stock has fluctuated in the last year between call it. Like 100 to 150. And so our thesis has changed there and we've just found better opportunities elsewhere. And speaking of those better opportunities, if we could just close the loop now on kind of sea limited, I know that's one of your larger holdings still currently. They have about a $50 billion market cap right now. If you're looking at just, let's say, gross profits, they have 10 billion roughly speaking and LTM gross profits. And that is up in incredible, almost 20X from 2019 where they have 600 million gross profits. So it's been growing a lot. Revenue is growing 36% right now. Operating margins are about 9%. So what are your kind of expectations with sea? Yeah. Look, I think sea is really interesting because let's just start with the downside, right? Because even though we invest in growth companies, I do, I am a value investor at heart. And so we do need to watch the downside. And what it is is basically sea is essentially trading at replacement value today. Essentially, they have called it $12 billion of cash and investments. They have a line of business called sea money or money, which is essentially a lending arm, a credit arm, lending to consumers and also some merchants. They have, call it about $8 billion in that business. They have greener, they're gaming business. That's about 1.8 billion of EBITDA as well. If you were to just liquidate all these businesses, right? It just don't give any credit. Take out whatever cash you can. You can take out your 12 billion. You can take out your eight from the lending business and just assume that business line no longer runs. You have a gaming business that does 1.8. You have Krafton or PUBG out there in Korea, trading at like six times. So let's just put a 5X multiple on it, very similar game, right? Battle Royale, mobile based, et cetera. You're really looking at an implied value of shoppy that had like 18 to $20 billion. And this is a business that is doing, did 127 billion of GMV last year and growing GMV, 25% plus. They're going to do north of 160 this year. And so you're looking at, call it, one eighth of GMV on the implied value of shoppy. Now the question really the market is having and why the stock has gone down so much is, no one has high confidence what terminal margins looks like on this business. And they haven't done it, they've kind of shot themselves in the foot as well by swinging investors around the last couple of years. So they were highly negative margins going into 2022. They had to get profitable really quickly. Profits then eventually went up to call it 1.2, a person that EBITDA has a person in GMV and then they said no, we're going to reinvest. And then they came back and got profitable again and now they're in again in a reinvestment cycle. So investors hate being swung around because they don't have like linearity to like where ultimate margins will get to. But look, if you look at the most competitive e-commerce market in the world, which is China, you have four large players there. Every single company there is making either around two or above two percent EBITDA as a percent of GMV. And this is with four very large players all in a bloodbath fighting each other on the e-commerce segment. And so I don't think, you know, people have this misperception that, you know, you have to be like. the the fact of monopoly in order to squeeze out margins on a e-commerce business like this. I don't think that's actually the case. I think what needs to happen is each competitor needs to be rational and profit-seeking and kind of be willing to like stay within their lanes and kind of specialize in something different. And so what C is doing right now is they are again in an investment cycle. They're guiding to about 50 bips of EBITDA as a percent of GMV, but like I said, even in the most competitive market out there, you're looking at like two plus and C on a medium term margin is guiding to two to three percent EBITDA as a percent of GMV. So you can take management's word for it. You can look at China the most competitive market. There is never a case in the world where countries have gotten richer and yet e-commerce penetration has gone down. And so you have a very strong tailwind behind you as well, you know, just globally. And so the question is when does margins go from 50 bips to 2 percent? How long does that take and when are they satisfied with being done reinvesting into the business or not as aggressively as they currently are? I think that's just a question that the market is grappling and we can't answer that for sure either, but we know that number one there's very little downside at these evaluations. It was a similar case in 2020, late 23, when they were also fighting Tokopedia and TikTok at that time and they went into a reinvestment cycle, stock went down about 60 percent and then soon as they stopped reinvesting and said we're going to be a little bit more profit maximizing, stock went up 5x, right? And so that just shows you the volatility in this name and what the street perceives. But look, we think that eventually they're going to hit two and you're going to see those profits flow to the company and you're seeing going to see the stock re-rate materially. And it's interesting. It's a little similar what's going on in Mercado Libre right now. They kind of also are going through a reinvestment cycle. I'm just kind of curious, not that Brazil is necessarily critical to a sea-limited thesis, but do you have any thoughts on shoppy strategy in Brazil relative to Mercado Libre? And if you could maybe just give two sentences kind of describing the situation for those that don't know? Yeah, I mean the situation is that sea-limited back in 2019, 2020 started seeing that the business model was working in Southeast Asia and started exploring other countries to launch in and their first market was Brazil. What's interesting about Brazil is number one, there's a much better call it like credit infrastructure there. So access to credit. Number two, GDP per capita is a much higher, called like $10,000, $12,000 per person. And then number three is Mercado Libre has primed the consumer to shop online if that makes sense, right? Like people at least understand what shopping online in e-commerce is, even if they have never tried it before. The difference between that is you have to understand history and how these companies developed and how it kind of pigeonholed them to the business model that they have today, which is several years ago we started Mercado and realized that Mercado investors love Mercado because it never really had competitors. It was a monopoly within the Brazilian or Latin e-commerce industry. And why did they never have competitors? Because these guys were launched 25 years ago right after tech bubble 1.0 and there were very, very few startups that were funded during that 10-year period from 2022 to 2012. And so Mercado was able to grow when it was still an infant and a child without any competition at all. But they also didn't have access to capital, which meant they had to be self-sufficient and profitable very, very quickly. Well, how do you get profitable quickly in a country like Brazil? You go after the richer households, right? Those who can spend $50 like USD on a order, right? Not very many households in Brazil can spend that much on a order multiple times a month. So you go after the richer households. What do the richer households care about? Brands, quality, service, logistics, quick shipping, right? And so Mercado then had to build out a, because their logistics is really terrible in Brazil. And so they had to build their own and spend a lot of capital on that. But to justify that spend, they also need to keep serving the top 1% or top 5% of households, right? Because the AOVs are there and it's how you get profitable. What shoppy realized and why they entered was they realized this was a chicken-rake problem. You know, Mercado had never faced competition because they kind of captured that top sliver of society and the upper income households. But how do you serve called the bottom 95% profitably? You need order density, right? You need to make your money almost like on volume. You need to like going into rural Brazil, shipping times are going to be longer and it's going to cost you more to ship that package to and that package is probably going to be lower order value, right? It's not going to be $50. It might be $10. And so you need to be able to justify that spend. Well, how do you do that? Is you need to get that person plus their neighbor plus their neighbor plus like a hundred dollar neighbor to all order from this app so that you can justify building a logistics route to that neighborhood. Which meant you had to spend a lot on not just logistics but marketing and consumer customer acquisition, right? And so they basically said we need to spend $4 billion here. Well, how many startups have $4 billion to jumpstart that chicken rig problem? Not very many. The only real companies are like Amazon, which Amazon could have done it, but they just never focused on it. And I think they have a very different business model. So it wasn't necessarily in their sweet spot of what they do. And then shop E, which has done this in Southeast Asia already. And they had access to $4 billion. So let's say, you know, let's spend this and jumpstart this chicken rig problem. And the tam of that 95% is going to be higher than what Mercado does. So they came it from that perspective. And five years ago, kind of everyone wrote off this business and said like, there's no way they can disrupt Mercado. But now, Shop E is the second largest owner of warehouse space right after Mercado. They just signed the largest lease in Brazil for the largest warehouse ever built. It's like even not fully built yet. In addition to they ship more packages per day than Mercado. Through their own logistics, 70% of all packages are fulfilled internally by Shop E Express. And so they kind of prove the market had this concept that Mercado's logistics network was really like their holy grill moat. And Shop E proved that within five years and enough money, that moat really isn't that hard to overcome and replicate. Right? I would even say just having good logistics now is like table stakes if you wanted to be a e-commerce player. Yeah, I know the pushback of that would be that they really only have quick shipping and like Rio de Janeiro, a couple other large cities. And if you go outside of the large city centers, then you're getting you know, five day one week shipping times. And that's a much harder problem to solve. Just because I do want to touch on some other investments. But this was kind of interesting just kind of getting that juxtaposition. And on this channel, we talk more about kind of what I would say is my rebuttal to that. At least from Mercado Libre's perspective. But is there any other final thoughts you want to say on Mellie or C. Limited before we maybe touch on a different one? No, I would just say like probably the biggest misconception out there is I think both Mercado and C. will do just fine. Right? I think they're going to carve out their segments of like who their primary customers are. Like I said, Mercado will probably take like the top 10% top 20% of households and C. will try to serve the other 80% right? And the business models for each are going to be very different and what consumers care about are very different because income levels are different and you know priorities are different. But I think they can both coexist and make money. It doesn't have to be like one or the other. Yeah, no, it's interesting though because Mercado Libre very explicitly said, you know, we don't want to lose the lower end and they just knock down their free shipping thresholds and they're doing a lot to kind of address shopied and not seed that market. So it'll be interesting to see what happens there. Maybe kind of switching gears. I know you're also an investor in apploven. That is a company that is always kind of bewildered me. I kind of understand a little bit about AdTech. I kind of understand why it's working. I don't to be honest understand why it's gone as well as things have gone for them. I think they probably were a beneficiary of ATT but if you could kind of just give us a little overview of the apploven business and kind of your investment thesis there. Yeah, so we invested in apploven in early 22 in the spring of 22. You know, the stock had IPO'd the year before it had gone up to north of 100. I believe like 120 and then was in a drastic decline along with the rest of the market in 22. The reason we got interested was at the time in 2022, the most of the markets still viewed this business as like a mobile gaming business, like a mobile studio, right? That just makes free to play games. I think if I remember correctly, it was 70% of revenues at that time. But 30% of revenues with this ad tech network that they were building that was growing triple digits, like 100% plus. And I looked at that and I was like, what the heck is going on, right? Because the stock at the time was also trading pretty cheaply like around 10 times free cash flow. And so when you study that business more, you realized this is actually not a mobile gaming business. The core business is actually ad tech network, which is much better business than mobile games. Because if you understand mobile games, you might make $100 and maybe your profits are like call it $40. But that $40 is all going to get reinvested right back into the ad tech network to try to acquire more users and keep spending the wheel, right? And what gave me background on this business just really quickly is that we had studied the entire mobile gaming ecosystem back in 2018. So the full stack, right, everywhere from studios to ad tech networks to gaming engines to the supportive players all around it. And maybe some of the outsourced technical staff in Eastern Europe and etc. We studied all of these businesses and came to the conclusion, what do you want to own in here? You want to own either the ad tech network, which essentially takes a rake every single time the money spends in this ecosystem or you want to own the gaming engine. Now obviously Unity owned the gaming engine and so we always kept that in back of our heads. Well Apple have an IPO a couple years later and we see the ad tech networks who are already familiar with that business. And what's interesting is that they basically spent a billion dollars on games in 2018 on gaming studios, so choir all these gaming studios, which provided them with 200 million players that were using these games every single day. And what's important is to your point about ATT, right, when ATT happened and Apple kind of shut off all the identification for iPhone users and fifth, I believe the stat was 51% of users opted out of sharing data, right, with third party apps. Well, holy crap, you just lost the huge portion of the population that you no longer have a signal on and can no longer target for ads. Apple oven had the wedge. They had a unique data source that no other ad network had, which was these 200 million players that they had acquired several years ago. And these players, the reason Apple oven bought them was they kind of saw the writing on the wall that maybe this would happen and Apple would, you know, enact this and they really needed to own the data. All of these usage metrics kind of fed into their ad model. So they were able to target much better. And if you have 200 million, you know, players and there's like a billion plus players in the world, you can kind of extrapolate that, right, and your model will be able to target much better than all the other ad networks out there. So that was their advantage as well, you know, after ATT happened and why that ad tech network did so well. And the thing is that this entire ecosystem, mobile gaming, I almost view, like I said, almost like a circular economy. It's almost like a casino, you know, you make some winnings and you plow it right back in the slot machine to try to win again, right? That's how most mobile gaming studios work. But in the middle sits the ad tech network, which is Apple oven and they take, instead of taking, you know, a couple percent edge like a casino does, they take 25 to 30 percent rake every single time that wheel spins. And so they basically suck out a lot of the profits and the profits accrue to them in the mobile gaming ecosystem. What's unique about mobile gaming is that mobile gaming is actually the majority of all app revenues, right? You think about the app economy. It's about 120 billion. Mobile gaming is north of 60 billion of that. And app, you know, is, you know, call it, they're serving about 15 billion of that today on the demand side. The other thing that gave them advantage is that this is almost like a black box algorithm, right? And so that's what gives people a lot of comfort because they can't actually vet, you know, what makes this special. But you know, with any algorithm, the more data you feed, the more accurate the model becomes and the better the targeting becomes. And what they did right was number one, they bought the mobile game studios. So they knew the demand side, they had demand side data that no one else had. And then they bought MoPub for a billion dollars. MoPub was one of the largest mediation platforms, almost like a cell side broker representing ad slots inside a games. So not only did they own the demand side or the buyer broker side of things, with like 30% market share today, they had 70% market share on the seller side of things. So they had full stack visibility into the entire value chain and like kind of like how much inventory slots were worth that other ad networks just didn't have access to, right? And so they can price much better than competitors. That was their winch. Yeah, so it's really interesting because I feel like there's a lot of different players that were trying to kind of build this ad marketplace where you could get both the demand side, the supply side. And you took the opinion that apploven would be the one that would be able to do that. And as soon as someone kind of gets a foothold in there, then there is a lot of inertia that brings a lot more game developers to their platform, a lot more advertisers there. So you do kind of have that as a benefit from them. But my understanding now is that kind of to get this next leg of growth, it's going to be more dependent on the winning a lot of different advertisers that they traditionally haven't been that big with a lot of different e-commerce advertisers. And maybe they're particularly strong advertising with mobile games, but you know, someone going to be in a video game app and get an ad for a hair dryer and go ahead and just buy that right then. So do you see any limits to kind of this model? Because I believe it's right now around $160 billion valuation. Maybe has around $3.3 billion in earnings. So you still do need a lot more growth in order to kind of rationalize an investment here. Yeah, 100%. It's a very different thesis at this price than when we originally bought it, right? We started buying this around $27, you know, double down when it was around $13 and the RSUs were struck like three to four times, you know, the current stock pricing rate. That kind of was a good signal. But you know, at that point, you know, no one was pricing into ad tech network and also it was trading at three times cash flow at the bottom. And so, you know, cash flow has gone up tremendously along with multiples and that's kind of created the stock price rise in the last couple of years. From here on out, I think you're right. I think, you know, they're pretty well entrenched in the gaming side of things. It's very hard to gain incremental market share or find like new games to kind of serve. It's really going to be about conversion at this point. Adam at the one of the sales side conferences a couple of months ago gave the stat that their conversion rate is about like 1.3%. So like 99% of ads that they serve actually are not monetized. And they think just through self improvement of the model, they can get to 5%. And so, you know, that's like a 4x increase, right? And just conversion alone. But obviously they're also going to target better and so that they can extract more margin out of that. So instead of like a take rate being 30%, maybe they can make like a 40% take rate or 50% take rate as their model gets better. So revenue should grow even faster than 4x. And so, you know, that's really what you're playing for at this point in time and what drives their conversion from like 1.3 to 5 is diversity of ads, right? And let's say you're playing candy crush right now. You're happy with the game and you're not looking for a new game to play. Well, if Apple oven serves you another gaming ad, you know, it's a waste of time and space, right? You're not going to click on it. You're not going to download the game. But if they serve you like an e-commerce ad, you know, maybe it's like a quince shirt or something, right? You're looking for that anyways. And so you might actually click it in your, in so conversion rates go up because of diversity of ads. And so that's really why they're trying to get into e-commerce to just increase that conversion rate. And I think, yeah, what's interesting about them is that again, this is a, the reason why investors are so uncomfortable is that this is a black box algorithm. I don't think Adam can even tell you what the algorithm does or what it's going to predict, right? But it's the way I relate it to is like, it's like Citadel securities or like two sigma or like, you know, Renaissance technologies. These are, you know, automated market makers with also black box algorithm that takes a spread on making a market. It's just these, these other players make a market in the financial markets and Apple oven makes a market in the ad market, right? But the difference is that instead of taking a couple basis points on each trade, you're taking, you know, 30%, right? So it's a much different, it's a much more attractive business for that reason. But look, if I could invest in Renaissance technologies, I absolutely would, even though I have no idea what the algorithm is doing, right? You can look at the outputs. You can see that either they're making more money or Apple oven, you know, their suppliers or call it the bitters of these ads are spending more and more money on Apple oven. And obviously they're getting ROI, you know, they're not dumb. They can, these are performance ads. They get instant feedback within seconds whether this ad is working or not. And so the more, the higher there are a wide, the more they're going to spend, right? And so it shows that something is working as long as the both sides of that network are growing. Yeah. And I know you just said it, but I just want to confirm that. So most of their advertisers on the platform are returned on ad spend driven, right? It's not brand ads. No. No brand ads on here. Every single thing is performance based. And so it's like instant feedback. Interesting. So what do you think are the biggest risks then to this business model? Yeah. I mean, look, I think it just valuation, honestly. I think gaming itself, the way that we see it is like gaming itself is probably worth like a status quo, probably like three to 400 bucks a share. Everything on top of that is going to be a call option on e-commerce. And so the question right now is e-commerce is starting to work. We're starting to see like data that shows that that is actually starting to accelerate. Maybe not as quickly as some investors had hoped, but it is accelerating. And so people are starting to spend more and we're even hearing that the cost of the ads are going up and starting to price out some of the lower tier games because these e-commerce advertisers are able to spend more. So it shows that the mix is starting to change and e-commerce is starting to become a meaningful part of this business. But it's still a call option. I think downside is protected because literally it would be very hard to disrupt Apple oven from the gaming segment at this point in time. No one else has 70% market share on the supply side of the business and call 30% market share on the demand side, which is right behind Facebook and Google. So I think gaming is well entrenched and they're probably going to make $10 billion on just gaming alone in a couple years. And then all the upside from here is call it e-commerce. And that's almost like a very wide range of outcomes. Yeah. I don't know that Apple is going to do this, but if Apple wanted this business, couldn't they just take it? I'm not so sure. Yeah. I think Apple oven definitely has a bit more entrenchment with their suppliers and has enough data out there that I think they'll be able to put up a good fight versus Apple. But Apple would be able to say it's all first-party data to us. Sure. We can open it, you know, more ad slots across all these different mobile apps. Yeah. Well, there always is that risk. And you know, Apple was going to crack down on fingerprinting a couple of years ago. We haven't heard much about that. And it's because they realized if they cracked on it, they kind of destroy, you know, basically 60% of what makes up the app store, right? The app ecosystem is essentially a mobile gaming ecosystem because 60% of revenues. And if you get rid of all this stuff, like, yeah, you can try to take it for yourselves and take the revenue for yourselves, but you also destroy the ecosystem and the ecosystem collapses. So I'm not sure it's in their best interest to actually disrupt it. Yeah. No, it's interesting too because Facebook used to have a business like this that they decided to get rid of, basically, and they don't have it anymore because they just figured the return on ad spend was always better on their platforms. But I do wonder if they ever, you know, decided to get back into it or something like that. But I, you know, usually, you know, by this point, if a business has been there and kind of got this entrenched and got this network of effects going, it's a much harder thing to disrupt. It's interesting though because, you know, I know Twitter had this, Facebook had this kind of mobile ad publishing business and none of them had been that successful with it. So for me, at least, it was a little surprising seeing, you know, app love and it's just a degree of success with it. Sure. Yeah, I, I 100% agree. Like, it's a risk, right? If any of these large tech companies want to, and, you know, there's been more noise out there of Facebook, you know, starting to take another look at getting into this business. So absolutely, it can create like disruption and noise in the industry and it's probably not going to be pretty for a couple quarters. So yeah, absolutely. That's, that's definitely a tail risk here. Yeah, but all investments have risk. Thank you for, for this discussion. I really enjoyed it. Where can people learn more about you or follow you? Yeah. Look, a lot of our materials are available on our website, hateandcapital.com. We believe in sharing publicly our research and, you know, always welcome feedback from other smart investors on these names. And I do post occasionally on X as well. And so you can find me under hate and capital there also. Yeah. And I recommend Fred's investor letters as well. I really like that. He does talk a lot about his research, you know, for the seed-limited research. He's going into the unit economics and it's actually really interesting to read. It's not this just like high level, you know, oh, it's e-commerce companies, secular advantage. No, it's like, here's the unit economics. Like, we've been able to figure out the on the ground research. So I always learned something from reading them. So I really do like those. I think everyone should read them as well. And thank you, Fred, for joining the podcast. I really enjoyed this. Yeah, absolutely. Thank you, Drew. Appreciate it. Until next time.