Discover more from Tidal Wave
Notes & Takeaways from Sohn Conference
Below are key takeaways and notes from the Sohn Conference that was held yesterday. The Sohn Conference is an annual investment conference hosted by the Ira Sohn Foundation.
Proceeds from the conference support MSK Kids, the pediatric program at Memorial Sloan Kettering Cancer Center (MSK). You can (should) donate to the cause through the link below:
My notes and key takeaways from the conference are below. If you have any questions or suggestions about the notes, please comment below or email me at email@example.com. And per usual, this is not investment advice.
Divya Nettimi – Avala Global
Long Sony — the key thesis points are:
(1) Market underappreciates the quality of Sony’s assets and the recurring revenue/profit mix shift over the next few years. Sony is a misunderstood conglomerate with three key assets: Gaming, Image Sensors, and Music, all of which are number one in their respective segments.
The company’s gaming business has transitioned from a cyclical hardware-driven business to a subscription and software business.
By FY ‘25 ~80% of the gaming business’ revenue will come from subscriptions and software so the profit mix of the business will be higher quality and higher margin.
The image sensor business is the largest sensor manufacturer in the world e.g., used in every iPhone. Business is riding tailwinds from the increased content in cars and increased demand for high-quality sensors in phones.
Sony Music is less of a focus for the thesis but is also a market leader and is taking share. Should benefit from upcoming streaming price increases.
(2) Operating profits will inflect over the next few years. Both the Gaming and Image Sensor segments faced headwinds over the last two years driven by supply chain issues and lockdowns. Those headwinds are expected to ease over the next two years, which leads to an inflection in operating profits.
Sales of PS5s were supply constrained during the last two years. As those headwinds fade, PS5 sales and installed base should grow 80% vs. FY ‘22. In addition, Avala forecasts console gross profits will go from negative to positive as input costs come down. The net impact is that gaming profits will CAGR at 27% over the next three years.
The Image Sensor business has also had headwinds on both the supply and demand side driven by lockdowns in China. As Android volumes normalize, and the company’s supply chain and manufacturing issues ease, margins should increase from ~15% in ‘22 to ~18% by FY ‘25. Avala expects this segment’s profits to CAGR at 22% over the next three years.
Gaming and sensors are the primary aspects of the thesis but the other segments are attractive as well. Sony Music continues to take share in the market and as the streaming platforms raise prices, the company should benefit.
(3) Attractive Valuation and Risk/Reward. Sony currently trades at 11x Avala’s FY ‘24 estimates. Based on Avala’s forecast for FY ‘25E, they think the stock has a ~58% upside (~30% IRR) with some call options from the company’s equity investments and other investments.
Mala Gaonkar — SurgoCap
Long London Stock Exchange (LSE) — the key thesis points are:
London Stock Exchange has transformed into a data analytics business. Through the company’s acquisition of Refinitiv, LSE has transitioned from a volatile exchange business to a data and analytics (“D&A”) business.
The acquisition was controversial and dilutive. Has led to the company underperforming since the transaction.
But 70% of the company’s revenues now come from the data analytics business. Surgo’s view is that this is a good trade because the D&A revenue stream has low churn and high pricing power.
Refinitiv was a mismanaged asset that LSE has turned around. After LSE acquired Refinitiv, the company made major products and salesforce investments.
LSE replaced the legacy Eikon platform with the more modern Refinitiv Workspace and has transitioned ~50% of the customers over.
The company has also invested in the salesforce and better-aligned sales incentives to incentivize cross-sell.
The investments are starting to pay off. Refinitiv has taken price for the first in line with their peers with limited pushback and has led to a 2.5x increase in subscription revenue growth.
Management has increased revenue synergies from 225M to 400M.
Re-rating from business transformation. Surgo argues that the transition should allow LSE to re-rate from ~22x (in-line with exchange peers) to ~25x P/E, which is more in line with the data peers, which trade at ~30x. Gaonkar points to FICO, S&P, and Transunion as case studies for the re-rating. If the company does re-rate to 25x, this represents a 166 pounds PT (~28% IRR from current prices).
David Rosen — Rubric Capital
Long Talen Energy
Post-reorg equity that will start trading OTC at the end of the month. Will start trading on the NYSE or Nasdaq by EoY.
Talen’s assets include Susquehanna (leading nuclear power plant), 10GW of non-nuclear energy production facilities, and some data center and crypto-related assets.
Surprisingly, the company filed for bankruptcy during a period when electricity prices were rising. Talen had hedges that required the company to post collateral as prices rose, liquidity they did not have so they had to file for bankruptcy. So the capital structure was not the core issue.
The shareholders (incl. Rubric) put in place a new management team.
The current value for the equity is $2.5bn but the company’s SOTP value is $4.5-6.5bn ($4-5.3bn without the non-generation assets).
Aaron Davis — Boxer Capital
Mirati is a targeted oncology company. The company develops drugs to treat the genetic drivers of cancer.
The stock is down 80% from ATHs; “generational drawdown in biotech. The current market cap is ~$3bn with ~$1bn cash on the balance sheet.
The lead drug received approval in Dec '22. The annual revenue opportunity for the drug is ~$600M and the second drug in the company’s pipeline has a 3x addressable population. The second drug is currently still in the pipeline.
Call options on the rest of the pipeline.
Scott Goodwin — Diameter Capital Partners
Long Level3 Bonds
The pitch is to buy secured (83c) & unsecured bonds (58c).
Bonds have traded down because of business and revenue declines with the corporate parent (Lumen) but Level3 has an independent cap stack.
Core Level3 business is doing fine (relative to Lumen) and has both asset and profit coverage for the bonds.
The bonds are fully covered by the assets and present a total return opportunity of ~100%
David Einhorn — Greenlight
Euro auto parts supplier, spin-out of Continental AG. European mid-cap and is effectively an orphaned equity.
The business is transitioning from an ICE supplier to an EV supplier. The spin-out was to designed to help the business more aggressively make the transition.
Current EBIT margins are depressed because of EV business’ margins are negative but will become profitable in the next two years. As a result, the total company EBIT will 3x by 2026.
The total company valuation is 2.6bn EUR, which per Greenlight, means you get the EV business for free.
Andrew Weiss — Weiss Asset Management
Long Korean HoldCo's SK Square, Samsung C&T, LG Corp.
All trading at a 70-80% discount to their net asset value.
Unclear what's driving the discount other than management and governance concerns, which Weiss thinks are overblown.
Welcome to Tidal Wave, a research newsletter about software, internet, and media businesses. If you have not yet, please subscribe below, and would appreciate it if you could follow me on LinkedIn (because you know, Elon).
Later this week I will be covering GitLab’s AI announcements and the competitive dynamics in AI as well as any relevant news from the Google I/O presentation.
Takeaways from Stan Druckenmiller’s Discussion
Every time there have been interest rates below 2%, it's been followed by difficult economic times.
“Biggest maxim in my business is don’t fight the Fed”
Much of the anecdotal evidence they look at (e.g., trucking, retail, banking) is all pointing negatively.
Hard to predict in this environment. The most important thing is to keep an open mind and react to policymakers.
Next year is going to be an election year, which puts the Federal Reserve in a precarious position if there’s a hard landing.
AI plays for Stan have been MSFT and NVDA. But questions if NVDA even experiences a downturn if there's a recession given chip/AI demand.
Copper is in the tighest position he's remembered but it’s hard to invest in that going into a hard landing. But coming out of a contraction, it'll be a huge beneficiary given the underlying demand drivers.
Patrick Collison’s Interview of Sam Altman
Large models vs. open-source (OSS) models:
OSS models will get benefits from the community.
But large models will always be on the frontier and years ahead of open source. The large models will solve the "harder" problems first (e.g., solving medical problems).
Sam's main personal use case for ChatGPT is summarization. Doesn’t really use other AI tools. RFS: CoPilot for everything on his computer.
Facebook’s strategy around AI has been “confusing” but they will be a surprising AI player soon.
Models are not a threat to search. It’s only a threat to Google if they don't do anything. So far the company is moving with intensity.
OpenAI will be a platform and consumer-facing co (e.g., ChatGPT). The platform will be used to improve consumer apps.
If you’re finding this newsletter interesting, share it with a friend, and consider subscribing if you haven’t already.