“Underlying these themes are companies that, in our view, are stronger than they were a year ago. Most have gone through cost reductions and optimizations themselves resulting in sustainable margin expansion and stronger overall balance sheets.”

“Uber Technologies, Inc. (NYSE:UBER): UBER was the top contributor in the quarter following a better-than-expected 2Q23 earnings report and 3Q23 guidance. Gross bookings of $33.6 billion were up 16% year over year. Mobility gross bookings of $17 billion grew 25% over last year driven by a combination of product innovation and driver availability. Delivery gross bookings of $16 billion were up 12% from last year. 2Q Adjusted EBITDA of $916 million, up $552 million year over year, significantly beat Street estimates of $845 million and the company generated $1.1 billion of free cash flow. Management guided to continuing growth in 3Q Gross Bookings (17%-20% growth) and Adjusted EBITDA (of $975-1,025 million).

UBER remains the undisputed global leader in ride sharing, with a greater than 50% share in every major region in which it operates. The company is also a leader in food delivery, where it is number one or two in the more than 25 countries in which it operates. Moreover, after a history of losses, the company is now profitable, delivering expanding margins and substantial free cash flow. We view UBER as more than just ride sharing and food delivery, but also as a global mobility platform with the ability to sell to its 130 million users (by comparison, Amazon Prime has 200 million members) and penetrate new markets of on-demand services, such as package and grocery delivery, travel, and worker staffing for shift work. Given its $4.3 billion of unrestricted cash and $4.4 billion of investments, the company’s enterprise value of $95 billion equates to just over 20x next year’s estimated free cash flow.”

“Our third-largest holding at quarter end was AT&T Inc. (NYSE:T), a leading provider of communications and connectivity services in the US. At $15/share, the stock trades at the same price it did almost thirty years ago. The share price is much less interesting to us in relation to where it has traded in the past than in relation to how much cash the company generates and what management is doing with it. At just over 6x earnings, the stock trades near its lowest price-to-earnings (P/E) multiple ever, also representing close to its largest-ever P/E discount to the stock market. The business converts most of its earnings to free cash flow, implying a forward free cash flow yield north of 15%. Just under half of free cash flow is going toward the dividend (7.5% yield), while much of the balance is going to debt paydown. In other words, if the stock does not fall below its lowest-ever valuation, investors clip a rock-solid 7.5% in cash, while owning a growing portion of a very steady business as management reduces debt outstanding. A discounted cash flow model will suggest that intrinsic value for shares begins with a “2,” suggesting the stock is undervalued on an absolute basis. The lack of volatility in the underlying fundamentals also makes it unique when compared to many other things we own, which reduces the probability of permanent capital impairment and argues for a significant weight in the portfolio.

AT&T looks particularly attractive when compared to some of the larger names dominating the S&P 500. Compare the stock to Apple, for instance, whose revenues and profits are likely to shrink this year, even as it trades at 29x this year’s earnings estimate. The ongoing return to rationality and capital accountability, along with extreme valuations in the megacap tech stocks, have us more excited about our portfolio’s prospects than we can remember for quite some time. As always, we remain the largest investors and welcome any questions or comments.”

“On February 24, 2023, Meta Platforms, Inc. (NASDAQ:META) released Llama, their LLM project, with the code being open-source but the training weights being kept proprietary. Nonetheless, within a week the training weights were leaked for the project. This release of the weights for 65 billion parameter model was a huge gift for open-source programmers to begin experimenting upon. Within weeks, other developers were creating innovations building on the model. There has been a race towards developing low-budget fine-tuning projects that can be trained for specific applications at the cost of a few hundred dollars in some cases. Some of these LLM projects can even be run on individual computers rather than data centers.

After the voluntary release of Llama’s architecture as open-source, the leak of the model weights ended up being a blessing in disguise for Meta. The innovation and improvements that followed were all built on Meta’s AI codebase. They were able to get these innovations without needing to pay any of the open-source developers for their efforts. This also demonstrates that the business advantage of the large tech companies is not in their models or AI codebase. Any innovations that the companies develop are unlikely to stay within the walls of the companies due to the mobility of researchers being poached between companies by recruiters. However, as these new model improvement technologies are made, the big tech companies have a scale advantage. They will be able to employ it into models that have more data, more compute budget, more parameters and therefore more intelligence in the resulting neural net.”

“Following significant under-performance, some high-quality businesses in these sectors are now becoming more attractive from a valuation perspective – in our language they are now getting warmer on our Bench of potential investments.

Our ‘all-weather’ portfolio centred around our unique definition of ‘quality’ delivered strong performance in the September quarter. Three companies positively contributed over 0.5% (in Australian dollars) to the Fund’s returns for the quarter (Booking Holdings Inc. (NASDAQ:BKNG), Intuit and Natural Resource Partners, in alphabetical order), and another three companies almost reached this level of positive contribution. No companies detracted from the Portfolio’s returns by 0.5% or more.

As part of our travels during the quarter (see page 6) we had the opportunity to meet with management of both Booking Holdings and Intuit. We continue to view both companies as exceptionally well managed.

Booking Holdings, the world’s leading online travel agency, continues to benefit from a strong global travel environment with particular strength in Europe, Booking Holdings’ core market. Fears of peak ‘revenge travel’ following COVID-19 lockdowns have been misplaced in our view. We assess current travel volumes to be only slightly elevated compared to pre-COVID-19 trends, with some regions, particularly outbound travel from China, still relatively depressed. Anyone who has travelled anywhere recently will be nodding when we say hotel rates have increased meaningfully in recent times. Accommodation providers are generally doing quite well, but the increased hotel rates have been necessary to offset inflation in costs such as employee salaries and additional cleaning services. As Booking Holdings ‘clips the ticket’ of accommodation spend, the company has benefitted from increased average daily hotel rates. Importantly, Booking Holdings continues to invest in its business, improving the reach, quality and range of services it provides, resulting in gains in market share and an extension of its industry leadership position. Booking Holdings is now more fairly valued by the market, but still provides attractive base case risk-adjusted returns and remains one of the larger investments in the Fund.”

"Even after this rally into year-end, we would remain overweight semis in 2024 as inventory has peaked and started converting to revenue," UBS’s Timothy Arcuri said.

"To be clear, Palo Alto Networks is a great company, technology leader, execution has been stellar, and [Raymond James] doesn't fight investors that have a time horizon longer than its 12-month mandate. However, [Raymond James] believes the risk/reward in the stock is becoming less favorable,” Raymond James said.

“Across the Information Technology universe, we seek companies possessing differentiated capabilities, products, and services. Palo Alto Networks, Inc. (NASDAQ:PANW) supplies network and cloud-based security solutions to enterprises, service providers, and government entities. The latest quarter was mixed with the company falling shy versus the Street on billings, in line for revenues, and outpacing earnings. Palo Alto’s updated guidance was materially ahead of lowered Street expectations. Nevertheless, its shares pulled back by -8%.”