Dear partners,
Thank you for your continued trust and support; you are the best partners I could ask for.
So far, we’ve written five letters detailing our strategy and diving into portfolio companies that rank highly across the growth, quality and valuation continuums. At the end of the day, everything is ultimately about valuation – it’s just that valuation is an art and a science. Time is the friend of the great business but the enemy of the terrible business. Therefore, to increase the odds of making money, it makes sense to invest in great businesses at reasonable prices. Obviously, the ideal is to buy an amazing business at a cheap price, but those opportunities rarely happen because the market is a pari-mutuel system, meaning the odds are constantly changing. Sooner or later, the price becomes too good for other investors to pass up and the price goes back up.
What happens more often is finding some really good deals if you’re just willing to look a few years out. For instance, not buying Nvidia was the biggest mistake of last year by far. I saw the hype coming with ChatGPT but I just couldn’t fathom that the company’s profits would accelerate so dramatically. At the beginning of 2023, the company was worth $360 billion and doing $6 billion in quarterly revenue. Now, the free cash flow run-rate is $44 billion. That was ~8x forward free cash flow! For one of the most dominant businesses over the past couple of decades. I mean talk about a fat pitch. I simply didn’t think $6 billion in quarterly revenue could turn into $11 billion in free cash flow in just one year. Just amazing stuff. Instead, I had a high weighting in small caps for the beginning of 2023, primarily Sanara Medtech, IDT, and Inspire Medical – all good companies – but certainly not Nvidia-caliber. I just vastly underperformed with these trades compared to the opportunity cost of Nvidia, which was right in my wheelhouse. I think that’s why it’s such a big mistake – because Nvidia is a company I’ve studied extensively and I missed the big move.
Further, I think there is a tendency to say “well, we missed that big winner” and then tear your hair out as the stock grinds higher. But it’s all about the future. Quite frankly, I don’t think Nvidia’s valuation is necessarily in bubble territory. It is possible for the company to do $70 billion in EBIT next year which is roughly 30x forward earnings. It is harder to know what calendar 2025 will look like in terms of demand and I wouldn’t be surprised if there is an air pocket where demand drops off slightly as some of the AI hype dies slightly, before continuing its ascent. To speak out of the other side of my mouth, I think AI is changing the nature of some of these formerly cyclical semiconductor companies. Semis have historically been cyclical so buying them at low multiples was a recipe for underperformance but as the hyperscalers need these chips, I think the upgrade cycles could shift demand to be more secular rather than cyclical. Because of this, we did trim Tesla slightly to buy a small position in Nvidia. I think this is a good case study in terms of “missing” a winner and the process for following it and deciding whether you can still make money from it. These scenarios of opportunity cost can be trickier to deal with than a loser because the magnitude of the opportunity cost can mess with your psyche. I think you need a sound process for dealing with FOMO while still keeping a level head to focus solely on the future. Getting in early and riding the wave based on granular S-curve estimates is the ideal scenario but all that matters is the future. A stock that has doubled can easily double again if the future earnings potential is still underappreciated.
Speaking of which, I think it could make sense to revisit Nu Holdings, as the stock has more than tripled from our initial purchase price and we haven’t sold a share. In our first write-up, Nu was around a $16 billion valuation and now it’s around $54 billion. Even still, I think the future is bright. The company could do over $2 billion in earnings for 2024, leaving us at 27x forward earnings for plenty of future growth. That’s not necessarily a demanding valuation for 60% growth.
The company is now the third largest financial institution in Brazil, with about 88 million Brazilian users. In Mexico, Nubank is already the 6th largest bank with about 8% market share. And the company recently was approved for its final banking license in Colombia. These are the three geographies that Nu is focused on right now but they likely aren’t the only ones over the next decade. Nu has a culture of moving very slowly because underwriting risk takes time to deeply understand customer behavior. This unique approach to underwriting means that the company focuses on only a few geographies and a few products, expanding over time. For nearly the first five years, the company only had a credit card product in Brazil. Now that’s patience! Only now is Nu really expanding into adjacent areas like payroll lending and investment products. Phase one of customer acquisition in Brazil is shifting into phase two of increasing the average revenue per customer. And the company will now replicate that strategy in Mexico and Colombia. It will take time but the low cost structure combined with deep risk management has enabled the company to grow fantastically.
In Q4 of 2022, when we started buying the stock, the company did $125 million in quarterly EBIT. When annualized, the valuation was about 32x forward earnings. Now, the company is doing $500 million in quarterly EBIT, implying a 27x forward multiple. This is the exact type of situation we look for! The stock has more than tripled but the multiple has decreased by almost 20%. That is amazing! And that’s what happens when we carefully stick to our mandate of buying the world’s fastest-growing, highest-quality businesses for low multiples. Here’s to many more decades of finding companies similar to Nu Holdings.
Closing
I’m honored to have you as a partner. Thank you for your trust and support. It enables me to think long-term and will be our own competitive advantage.
The stock market, like life, will have its ups and downs. All we can do is focus on what we can control and work hard to continually raise our standards. Our strategy is simple – hitch a ride to the world’s best entrepreneurs that are running the fastest-growing, highest-quality companies at the most attractive valuations we can find. Here’s to many more years of focusing on the inputs and letting the outputs take care of themselves.
Sincerely,
Ryan Reeves
Disclosures
Infuse Asset Management LP (“Infuse”) is an investment management company to a fund that is in the business of buying and selling securities and other financial instruments. This information is provided for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell an interest in a private fund or any other security. An offer or solicitation of an investment in a private fund will only be made to accredited investors pursuant to a private placement memorandum and associated documents.
Infuse may change its views about or its investment positions in any of the securities mentioned in this document at any time, for any reason or no reason. Infuse may buy, sell, or otherwise change the form or substance of any of its investments. Infuse disclaims any obligation to notify the market of any such changes.
The S&P 500 is a U.S. equity index. It is included for informational purposes only and may not be representative of the type of investments made by the fund. References made to this index are for comparative purposes only. Reference to an index does not imply that the funds will achieve returns, volatility, or other results similar to the index. The fund’s portfolios are less diversified than this index. Returns for the index are total returns which includes dividends and do not reflect the deduction of any fees or expenses which would reduce returns.
An investment in the fund is speculative and involves a high degree of risk. The portfolio is under the sole trading authority of the general partner. An investor should not make an investment unless the investor is prepared to lose all or a substantial portion of its investment. The fees and expenses charged in connection with this investment may be higher than the fees and expenses of other investment alternatives and may offset profits.
The information in this material is only current as of the date indicated and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Any statements of opinion constitute only current opinions of Infuse which are subject to change and which Infuse does not undertake to update. Due to, among other things, the volatile nature of the markets, and an investment in the fund/partnership may only be suitable for certain investors. Parties should independently investigate any investment strategy or manager, and should consult with qualified investment, legal and tax professionals before making any investment.
The fund is not registered under the investment company act of 1940, as amended, in reliance on an exemption thereunder. Interests in the fund have not been registered under the securities act of 1933, as amended, or the securities laws of any state and are being offered and sold in reliance on exemptions from the registration requirements of said act and laws.
Performance Appendix
Net Returns | Infuse Partners LP | S&P 500 |
Q3 ‘22 | -10.85% | -13.39% |
Q4 ‘22 | -22.21% | 7.09% |
Q1 ‘23 | 10.06% | 7.04% |
Q2 ‘23 | 0.40% | 8.29% |
Q3 ‘23 | -8.52% | -3.65% |
Q4 ‘23 | 16.35% | 11.23% |
Q1 '24 | 31.15% | 10.39% |
Since inception | 6.97% | 27.19% |