HGI Newsletter #355

Dear readers,

I had actually planned to report here on the latest developments in the takeover battle for PayPal. However, PayPal’s Q2 report provided hardly any new fundamental insights and no new information about the behind-the-scenes negotiations with Stripe and other interested parties. I have therefore decided not to publish another post on PayPal at this time, especially because PayPal’s stock has barely moved due to a lack of new catalysts.

In contrast, the quarterly reports from the Big Tech companies caused quite some movement last week. The hyperscalers impressed with high growth rates in the AI cloud sector and major profit jumps. As a result, shareholders of Alphabet (+12%), Amazon (+17%), and Microsoft (+22%) celebrated double-digit price gains over the course of the week.

But be cautious: These outstanding profit increases are largely driven by write-ups reflecting the appreciation in value of their off-market stakes in OpenAI and Anthropic. Amazon and Microsoft now each hold Frontier AI stakes with a book value of around $240 billion. For Alphabet, the figure is approximately $135 billion. Should the extremely high pre-market valuations of OpenAI ($852 billion) and Anthropic ($965 billion) not be confirmed by a successful IPO, the hyperscalers could be forced to take corresponding write-downs.

However, what I find far more concerning than the declining balance sheet quality of the hyperscalers is the fact that a large portion of their revenue growth comes from their two loss-making investments, OpenAI and Anthropic. These frontier labs are already arguably the most important individual customers of the three hyperscalers. The concentration at Microsoft is particularly striking: OpenAI is estimated to generate about a quarter of Azure’s revenue. In any case, investors should be aware that a negative development at the U.S. Frontier Labs would also have major negative consequences for the U.S. hyperscalers.

This makes the recent comments by Microsoft CEO Satya Nadella on the future of AI architecture all the more remarkable. He said customers want to select the right AI model for each task - based on quality, speed, cost, and regulatory requirements. His most significant quote from the Q2 earnings call - one that OpenAI and Anthropic are unlikely to appreciate - is:

“We are very, very clear about the architectural design of the platform, which is that you’ve got to keep your harness separate from the model... That means any given model at any given time is swappable.”

Why is this really good news for the heavily beaten-down software stocks - such as Elastic, Monday, HubSpot, and UiPath from my investable sample portfolio, all of which gained 12–18% last week?

Please read my following article about it:

The Comeback of SaaS Stocks That Were Written Off

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Jul 28

SaaS isn’t dead. The stock market is starting to realize that, too. The next competitive moat in the enterprise software sector won’t be built around the largest AI model, but rather around the so-called “harness” surrounding it—that is, the layer that transforms raw AI into real, productive work. That’s why I believe that select SaaS companies are significantly better positioned for the AI era than the market currently prices in.

Why Individual Investors Can Invest More Successfully Than Fund Managers

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Jul 22

I’ve been thinking a lot about Terry Smith’s (the “English Warren Buffett”) capitulation. Some observers have already interpreted this as the beginning of the end for value investing. It reminded me of an old blog post of mine that sparked controversy nearly 10 years ago and whose thesis has been confirmed by recent events. Here’s my current take on active funds.

People Stock: From a Holding Company Discount to a Casino Bet

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Jul 8

The investment case for People Inc. has fundamentally changed. Until now, People Inc., formerly IAC Holding, was a relatively straightforward "sum-of-the-parts" story. However, Barry Diller now wants to acquire a majority stake in the much larger MGM Resorts Group, thereby transforming People into one of the world’s largest hotel and casino holding companies. Here is my updated assessment of the new opportunity/risk profile...

Zoom Stock: Is It Time for Me to Buy Back In?

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Jul 2

Three years after the end of the pandemic, the former COVID-19 star has evolved into a highly profitable cash flow machine with AI potential. Zoom’s early pre-IPO investment in Anthropic also provides a sort of safety net for the valuation. But is that enough for me to buy back in?

Airbnb Stock: Will Airbnb Become a Travel Super App?

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Jun 24

It seems that Brian Chesky, the CEO of Airbnb, read my article from a year ago about Airbnb. At that time, I suggested that rental cars and boutique hotels would be logical additions. Now, these offerings are finally coming to the Airbnb app. The next step could be a partnership — or even a merger — with Lyft. Here’s my latest update on the Airbnb stock in my portfolio...

Thank you for your interest! If you would like to support my work, please forward this free newsletter to friends or acquaintances who are interested in investing in tech and growth stocks.

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Best,

Stefan Waldhauser

Disclaimer: This newsletter is an expression of opinion and does not constitute investment advice. Please note the legal information.