Project $1M is the concentrated portfolio that I am running with the aim of growing a ~$275k base into $1M over a 10-year period.

My broader investment focus with Project $1M is the purchase and long-term hold of a clutch of high growth, cash-generating businesses that are powered by secular tailwinds. The advantage of these secular tailwinds should be to allow the selected businesses to grow under any economic conditions that may be experienced over the life of the Project $1M portfolio (a decade or more).

Markets may move the prices of Project $1M businesses around, here and there, depending on sentiment, however I am focused on the long-term returns on invested capital that my businesses can generate and the opportunity to deploy that invested capital at high rates of return over a long-term horizon. For those that are new to the Project, here are Part 1, Part 2 and Part 3 of the initial investments in the portfolio.

July brought an interesting turn of events for the portfolio. The reporting season was generally quite strong for many of my holdings. Notably, both Google (NASDAQ:GOOG) (GOOGL) and Amazon (AMZN) significantly exceeded expectations. Unfortunately, the real shocker of the reporting season was Facebook (NASDAQ:FB). While Facebook’s reported result was not bad, it was forward-looking guidance that spooked the market, with Facebook indicating declining revenue growth over the next few quarters.

A modest single-digit deceleration from Facebook’s 40% quarterly revenue growth, would still put future revenue growth somewhere into the 20% range, still not a bad result for such a large business. Facebook stock got spanked on the forward-looking guidance and was down close to 18% after results were reported. That had a significant impact on Project $1M’s July performance, with Project $1M performance for the month clocking a 1.67% gain, less than half that of the performance of the S&P 500.

July was a month of elevated volatility for Project $1M in general. The gains in stocks like Google, Amazon, MercadoLibre (MELI) and Atlassian (TEAM), were offset by large declines in not only Facebook, but Alibaba (BABA) and Tencent (OTCPK:TCEHY) as well. Market panic over a potential trade war with China has sent the Chinese internet stocks to major lows. I’ve been eyeing Tencent for a little while now. A fall below $35 would certainly get my interest in topping up my holding again.

Facebook and Google: Is data monetization doomed?

Facebook’s business seems to be under siege from new privacy regulations that have been enacted in Europe. Known as the General Data Protection Regulation (“GDPR”), this new regulatory framework impacts how a user’s data can be monetized. Meanwhile Google has been hit by a massive antitrust suit by the EU antitrust regulators around the way it bundles or preloads other Google services, such as the Chrome browser with its Android OS. On its surface, this appears suggestive of a concerted attack on user data and its monetization, particularly in Europe. It’s hard to tell whether this may be a harbinger of more concerted action to come.

I briefly considered topping up my holdings in both Facebook and Google, as I felt I really didn’t own enough off either of these high-quality businesses as a overall proportion of Project $1M. Google and Facebook make up 12.5% of the portfolio, a significant, but possibly insufficient allocation given the high quality of their franchises. The thing that gave me pause in terms of topping up my holdings was the extent to which regulators, particularly in Europe, may choose to increase the screws on data monetization.

My biggest concern with both of these businesses was always regulatory. I have no concerns that each will be a dominant franchise at the end of the next decade. Nonetheless, regulatory action poses a threat to both of these businesses being able to monetize to their full potential. For that reason, I’ve decided to sit pat with my position in each and not increase.

Make no mistake, consumers and advertisers continue to be enraptured with both platforms. Google’s search share shows no signs of eroding. Facebook users continue to flock to the platform, in spite of concerns that their data has been misused by 3rd parties, given the platform still provides significant utility to tap into social circles. Both businesses provide the easiest way for advertisers to tap into targeted pools of users across different demographics, at scale, across the globe, in a way that no other platforms have been able to do.

Facebook and Google will continue to dominate their respective niches and will grow and thrive if the regulators can stay out of their way long enough.

Tencent and Alibaba: Chinese internet stocks underappreciated

Threatened tariff action between China and the US has deflated the value of the Chinese internet leaders, with Tencent in particular starting to offer good value. While this still isn’t anywhere close to the environment of early 2016, when there was fantastic value in Chinese stocks, selective bargains are starting to emerge. I have my eye on Tencent and could be an interested buyer again at $35 or lower.

What the tariff concern around Tencent and Alibaba seems to miss is that they are primarily China-centric businesses with respect to their growth profile. The domestic Chinese economy can sustain the runway of these giants for a very long time. While both may have global and US-centric ambitions, it is not necessary that those need to be fulfilled to justify the current growth trajectory and valuation.

I believe both Tencent and to a lesser extent BABA have become casualties of the broader hype around what Trump’s tariffs may do to the broader Chinese tech sector. For China-based semiconductor manufacturers and electronics component makers there are real, material consequences of a tariff war here. I struggle to see the same impacts for BABA and Tencent.

MercadoLibre: Volatility personified

To achieve long-term performance in a high-growth name, it sometimes means having to put up with extremes in share price performance. MELI is one name to whom this statement applies. From a high of $400 per share, MELI then proceeded to quickly lose more than 25% of its value within 6 months, and then rocket back up 15% again just as quickly, with no real rhyme or reason behind this wild move.

The long-term story still remains intact for me, and MELI continues to cement its position in internet-based commerce across Latin America, benefitting from a secular trend to growing online spending and increasing disposable income. Exchange rates will continue to fluctuate in MELI’s markets, however MELI’s long-term value proposition remains intact.

Concluding thoughts

Stock prices go up, and stock prices go down. Markets can be moody, euphoric and depressed with different stocks at different times. The beating that has been given to both Facebook and Tencent over the past few months appears excessive for me. I don’t believe anything material has changed to wipe out more than $100B in value from each of these stocks.

Drowning out the noise and keeping focussed on the underlying fundamentals of my businesses has served me well for the last few years. I don’t intend to do anything different at this stage.

Disclosure: I am/we are long ALL STOCKS MENTIONED.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.




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