May 19, 2024 • 1hr 20min

TIP632: Mastermind Q2, 2024 w/ Tobias Carlisle and Hari Ramachandra

We Study Billionaires - The Investor’s Podcast Network

In this episode, host Stig Brodersen is joined by Tobias Carlisle and Hari Ramachandra to discuss their stock picks and analyze current market conditions. Stig presents Burberry as an undervalued luxury brand, Tobias pitches Playtika as a cheap mobile gaming stock, and Hari makes the case for ICICI Bank as a way to invest in India's growth story. The discussion covers the bull and bear cases for each company, as well as broader economic trends impacting the market.

0:00

-0:00

Key Takeaways

Burberry (BRBY) is trading at an attractive valuation of 10x earnings for a luxury brand with over 150 years of history
Playtika (PLTK) is a mobile gaming company trading at 9.5x free cash flow with 70% gross margins, though growth has slowed recently
ICICI Bank is positioned to benefit from India's economic growth and increasing banking penetration, though valuation appears stretched
The luxury sector is currently facing headwinds, particularly for aspirational luxury brands like Burberry
Mobile gaming companies like Playtika face challenges with user retention and reliance on hit games
India's banking sector is consolidating, with the top 5 banks now holding 50% of deposits
Macroeconomic conditions remain uncertain, with mixed signals on inflation, interest rates, and economic growth

Introduction

In this episode, host Stig Brodersen is joined by Tobias Carlisle and Hari Ramachandra to discuss their stock picks and analyze current market conditions. Stig presents Burberry as an undervalued luxury brand, Tobias pitches Playtika as a cheap mobile gaming stock, and Hari makes the case for ICICI Bank as a way to invest in India's growth story. The discussion covers the bull and bear cases for each company, as well as broader economic trends impacting the market.

Topics Discussed

Current Economic Conditions (1:57)

The discussion begins with an analysis of the current economic environment, which appears to be defying conventional wisdom:

Interest rates have risen at the fastest pace in history, but inflation is not coming down as quickly as expected
Housing prices and the stock market continue to rise despite higher rates
Geopolitical tensions and wars do not seem to be significantly impacting key wealth indicators

Tobias Carlisle offers his perspective:

The yield curve inversion (short-term rates higher than long-term) has persisted longer than usual
Massive fiscal deficits and government spending may be offsetting the impact of higher rates
"We're in a grand experiment. I don't think any of this has been tried before. We've got the brakes on and the accelerator on at the same time."

Stig Brodersen emphasizes the importance of maintaining a long-term perspective and not trying to time the market based on macroeconomic predictions. He suggests holding physical gold as a hedge against potential currency debasement.

Disruption in the Technology Sector (13:37)

The conversation shifts to discussing the current state of innovation and disruption in the technology sector:

There is a perception that the pace of disruptive innovation has slowed
Large tech companies may be stifling competition and making it harder for new disruptors to emerge
AI technology may be reinforcing the power of centralized, well-resourced companies

Hari Ramachandra notes:

Many tech companies are now focusing on "responsible growth" and margin improvement rather than pure revenue growth
There have been fewer truly consequential new tech companies emerging in recent years compared to the 2010s
"We aren't innovating fundamentally the way we did in the 1900s. We are just going after photo apps or social network apps and thinking it is innovation, but it is just application of a fundamental innovation which was Internet."

Burberry (BRBY) - Bull Case (17:30)

Stig Brodersen presents his investment thesis for Burberry:

Trading at only 10x earnings, an unusually low multiple for a luxury brand
Over 150 years of brand history provides some durability
Stable 70% gross margins and 20% operating margins
Currently refurbishing stores, which has shown 15% sales increases per square meter
Targeting 50% of revenue from accessories (currently 37%)
5% dividend yield while waiting for potential multiple expansion

Stig argues that Burberry should be considered a luxury brand rather than pure fashion:

"50% of the revenue comes from these core products. It doesn't come from the newest collection in the world of abundance."

Burberry (BRBY) - Bear Case (35:18)

The discussion then covers potential risks and downsides for Burberry:

Low insider ownership and potentially misaligned management incentives
Luxury sector currently facing headwinds, particularly for aspirational luxury brands
Burberry is more exposed to economic cycles than ultra-high-end luxury brands
Brand perception issues in some markets due to past associations
Reliance on hit collections and changing fashion trends

Tobias Carlisle raises a concern about past brand perception:

"Burberry is famously associated with the early 2000s, sort of mid-2000s... They wore the, they famously covered themselves in Burberry. It was like their sort of mascot. And there was this period where it got picked up on... That damaged the brand."

Playtika (PLTK) - Bull Case (42:35)

Tobias Carlisle presents his investment thesis for Playtika:

Trading at 9.5x free cash flow and 11x earnings
70% gross margins and 20% operating margins
$2.7 billion market cap with $2.6 billion in expected revenue
Recently initiated a 5.5% dividend yield
Founder-CEO still running the company
Potential for acquisitions or being acquired in consolidating industry

Tobias sees Playtika as an undervalued company despite recent challenges:

"I can see that stock price up two times from here. And I still don't think it would be a particularly expensive company."

Playtika (PLTK) - Bear Case (52:23)

The discussion covers potential risks for Playtika:

Revenue growth has slowed to just 1% year-over-year
Daily active users declining by 6-7% year-over-year
Challenges with user retention and reliance on hit games
Privacy changes have made user acquisition and monetization more difficult
Potential regulatory risks for casino-style games
Geopolitical risks with operations in Israel and Ukraine

Hari Ramachandra notes concerns about the business model:

"Gamers can be fickle... Why are they not able to grow revenues organically and whether they're able to hold the attention of the gamers who are very easy to kind of, you know, lose?"

ICICI Bank Limited - Bull Case (56:01)

Hari Ramachandra presents his investment thesis for ICICI Bank:

Fifth largest bank in India with $128 billion in deposits
Positioned to benefit from India's strong economic growth (7-8% GDP growth)
Increasing banking penetration and digitalization in India
10% deposit growth and 14% loan growth (5-year CAGR)
17% net income growth (5-year CAGR)
4.3% net interest margin
Recognized as a systemically important bank by regulators

Hari sees ICICI Bank as a long-term play on India's growth story:

"If I think of these banks, they're all like what Wells Fargo or JP Morgan Chase or Bank of America were in the 1950s probably. They're at that nascent stage."

ICICI Bank Limited - Bear Case (1:12:47)

The discussion covers potential risks and valuation concerns for ICICI Bank:

Trading at 3.7x price-to-book value and 18.5x P/E ratio
Valuation appears stretched compared to developed market banks
Past scandals and periods of underperformance
Competition from state-owned banks and other private banks
Potential for economic slowdowns or banking sector issues in India
Currency risk for international investors (though rupee has stabilized recently)

Tobias Carlisle raises a concern about valuation:

"It looks like it's run really hard and it's looking a little bit stretched. But you point out that there's, so there's massive growth coming in India for infrastructure and it's going to require all of this credit."

Conclusion

The episode provides in-depth analysis of three diverse investment opportunities: Burberry as an undervalued luxury brand, Playtika as a cheap mobile gaming stock, and ICICI Bank as a play on India's growth. Each pick offers potential upside but also comes with significant risks and challenges.

The broader discussion highlights the current uncertain economic environment, with mixed signals on inflation, interest rates, and growth. The conversation also touches on important trends in technology disruption, luxury goods, mobile gaming, and emerging market banking.

Ultimately, the episode emphasizes the importance of thorough research, understanding both bull and bear cases, and maintaining a long-term perspective when making investment decisions. While macroeconomic factors are important to consider, the focus remains on identifying individual companies trading at attractive valuations relative to their growth prospects and competitive positions.