SIMON BROWN: I’m chatting now with Kyle Wales, global multi-fund manager at Flagship Asset Management. Kyle, I appreciate the early morning. I want to touch on Meta Platforms and PayPal.
But, before we do, growth versus value. For about a decade it’s all been around value stocks. Suddenly, in the last couple of weeks, sort of year to date, … the value stocks are suddenly having a bit of their day in the sun as growth sells off.
KYLE WALES: Absolutely, Simon. Since the beginning of the year we’ve seen the value index remain relatively flat while growth is actually sold off by about 11%. As you mentioned, it’s the first time we’ve seen such outperformance by value in a while. Even after this recent outperformance by value strategy, value remains down significantly relative to growth over the last five years.
In fact, growth stocks would have to fall another 50% for the returns of value and growth to equal one another over five years.
SIMON BROWN: Okay. So we are a long way from parity. The theory used to be that each would have their period of outperformance, and you could be a value investor for a while and then a growth investor. It really has skewed towards growth investing. In the note you put out you talk around … it having fundamentally changed. There is massive disruption and value-add coming from those growth shares. Is it over for growth? Is it a case of a lot of folks saying it’s time to look harder at value? Do you subscribe to that?
KYLE WALES: Well, Simon, both a pure growth strategy and a pure value strategy have their weaknesses. So I think people have to look beyond pure strategies. A blended strategy, I think, is a far more effective lens to view the world through. So at the end of the day … fundamental investors are trying to buy shares at a discount to their intrinsic value. Whether that is a high-yielding stock based on earnings yield or dividend yield and a lower growth profile, or a lower-yielding stock with a high-growth profile, I think there is value to be had in both camps, although we will see swings where one type of strategy outperforms another.
SIMON BROWN: We will. I like your point there. As an investor don’t pigeonhole yourself; find the opportunity of great investments. Two years ago everyone was suddenly buying gold after having said they would never buy it. At the right time the right investment is a good investment and labels shouldn’t matter.
KYLE WALES: Absolutely. I think in the world of today, flexibility is such an important thing because things change so quickly. As an investor you have to try and be on top of that change.
SIMON BROWN: Let’s delve into momentum up front there. Two of the growth stocks that have done phenomenally well, although they have had a tough 2022 so far. The first is Facebook. The market really didn’t like its results, knocked it off, what, 25% on the day. The stock’s almost 50% down from those highs of September last year. It’s now fallen as of last night out of the top 10 biggest stocks in the world. Is there something to see there? A lot of money was spent on [the] Metaverse; they’ve got issues with Apple; they saw a decline in users. Let’s be clear, they lost a million users which for them is literally a rounding error. But they remain. They own two of the largest social media platforms in the world.
KYLE WALES: Absolutely. With Facebook specifically there were two things that the market didn’t like. The first was they spoke about the competitive threats from new social media platforms like TikTok, but one must remember that Facebook has seen this sort of competition in the past – Instagram Stories is a response to Snapchat, for example, and they managed to see their way through it.
The second thing the market didn’t like was obviously this talk about the … Metaverse spend and all the money they’re spending there. But with Microsoft buying Activision Blizzard, we are increasingly seeing a number of tech players take the concept of the metaverse seriously.
And the final thing was their comments around [Apple’s App Tracking Transparency] change …. That will lead to a short-term impairment of the advertising inventory on Facebook. But Facebook, as I said earlier, remains a very competitive product relative to other ways of advertising.
SIMON BROWN: And then I hadn’t realised PayPal launched in the nineties. Of course Elon Musk was there in the early days. They downgraded revenue guidance from 18% to the 15-17% range, and the markets seemed to fundamentally hate that. But there’s a lot of competition coming here.
Of course, there are cryptocurrencies, there’s Stripe, there’s what was Square and is now Block, Jack Dorsey’s business. But they are the granddaddy in a sense in the new sort of finance payment businesses.
KYLE WALES: Yeah. With PayPal you mentioned the fact that they revised their revenue growth downward. But it was by a percent. We have to put the number in context.
The second point to make is that, despite downgrading they just pointed out the fact that their business is as healthy as it’s ever been.
Most of the downgrade relates to how their consumers are responding to a higher inflationary environment and the withdrawal of Covid grants.
There is, as you say, an increase in competitive intensity in the space, but PayPal is a massive business with massive network effects. So its users number in the hundreds of millions, and it’s accepted at three times the number of large websites in the US [than] the second-largest competitor, which is Apple Pay. So it is still quite a phenomenal company.
SIMON BROWN: What the market’s done here in both these examples, Facebook and PayPal, [is that] two months ago people would’ve been looking at these and thinking, oh, I like it. Now suddenly they’re massively on sale. They are down more than large double-digit numbers, and suddenly everyone runs for the hills whereas, in saying yes, things have changed fundamentally but perhaps not markedly. The prices, if anything, are giving an opportunity. As investors we should grab them.
KYLE WALES: Absolutely. I think it’s a very exciting time because the market swings from greed to fear,
…and I think we are seeing a classic fear moment here where a lot of these stocks, even though they generally tend to fall in the camp of growth, are starting to trade on value-like valuations.
So it’s very exciting for people who are prepared to take a long-term view and hold these businesses for the long term.
SIMON BROWN: I like that point. We’ll leave it there. The growth stocks are trading on value valuations.
Kyle Wales from Flagship Asset Management, I appreciate the early morning, sir.