Episode Transcript
The Finance Ghost: Welcome to episode 244 of Magic Markets. It's been a pretty busy time, not just in the markets, I think for us as well, Moe, lots going on - and sometimes it's nice to just sit back a little bit and reflect on some of the things in the portfolio, but also just things that are a comfort zone to invest in. Some of the themes that often come through when we talk about stocks, when we cover them in Magic Markets Premium.
And what we decided to do this week is talk about the “shovels in a gold rush” or any rush. So this is the shovel show and welcome to it!
Mohammed Nalla: I love the shovel show. As long as we're not shovelling something - I'm not going to say it, it's too impolite.
The Finance Ghost: But you know what.
Mohammed Nalla: You know what, right. Ghost really excited, this week I've got some stuff that maybe seems conventional to our listeners. But then I've got some interesting stuff as well, which may be stocks that you hadn't heard of and I've just recently added into the portfolio. I'm not going to give it away, Ghost. I want to actually have you go first. I don't know if you have a list of stocks that you want to cover when you're looking at buying shovels in the gold rush. You've got one?
The Finance Ghost: I've got one. I've genuinely got one that I wanted to talk about and I know you've got a few names that we need to get through. So I'm not going to take the thunder from you, Moe. You can hit us with your interesting names. Although I think it's important to start with why we like this actually, before we get into too many names. What is it about these shovels that are appealing?
Mohammed Nalla: So quite often when you're looking at a mega trend, the market latches onto that trend and again, it can be very powerful. If you just think of what's happened with Nvidia, for example, that's the AI gold rush. And Nvidia is, I would say, the prospector in this kind of analogy, right? They’re the prospector, they're out there, they're selling chips. But we always like looking at the other parts of the value chain. And that's where the saying comes from, is you want to be selling the shovels in the gold rush. You don't want to be the prospector, because if you're the prospector, you might actually strike gold or you might actually find fool's gold. There might be nothing there. But if you are the player that's out there selling the shovels, you get to sell those shovels to every single prospector that is out there. And so it's just picking a more resilient part of the value chain. That's part of the ethos of what we're trying to do here from a thematic perspective.
So I'll jump from that straight into some of the names I've spoken about. And again, because I've touched on AI, the obvious one here - I said there was one obvious name - that would be ASML. A lot of people don't know who this is. It is a stock that we covered on Magic Markets Premium a little while ago. If you're not a subscriber, go and check that out. There's a detailed report every single week on a global stock, as well as a podcast.
And jumping into ASML, they are the company that literally sells the shovels in the gold rush. They sell the lithography machines that are then used by the chip companies, the semiconductor companies to build the chips out there. And so effectively, they are supplying Intel, they are supplying TSMC, they are supplying a lot of those fabrication partners that are actually even elsewhere in the value chain versus a chip designer like Nvidia. I would say your prospectors are your chip manufacturers - that's Nvidia, AMD, Intel - but ASML is the company selling those shovels.
And the way I look at this is they are earning this toll money, if you want to call it that, from everyone that's digging for the silicon gold that's out there. Now, ASML provides the EUV lithography machines. They are really indispensable for the current generation of chips out there. It's not to say there are no risks, because if the technology changes, then obviously ASML would be vulnerable. But right now, they almost operate a de facto global monopoly on the really high-end machinery that's out there. What stands to reason here is that there are very high barriers to entry with a player like ASML. It's really the product of decades of R&D, a very complex supply chain that comes through there. And so all of this contributing to an overall moat for why I actually hold ASML. It's done really well. In fact, if you look at it just over the last two months or so, there and thereabouts, it's gone from around $650 a share to close on $1,000 a share. And this is at the time when, okay, yes, Nvidia has had a good performance, a lot of chip players have had a good performance, but for me this is slightly more defensive place in the value chain. It's a position in my portfolio and one that I'm quite comfortable holding Ghost.
The Finance Ghost: And one of only two tech companies in Europe worth anything really. The other one of course being SAP. So it's interesting, I mean, those two just always come up when anyone talks about big tech in Europe. Well, no one talks about big tech in Europe. They just say there are a couple that you could maybe put in the same category as some of the tech names in the US and ASML is one of the two. Literally. That's the position.
Mohammed Nalla: Indeed. And Ghost, I'm curious to hear what your one stock is. I've got another two to go, but I'm keen to hear what your shovel is in the gold.
The Finance Ghost: Yeah, so I mean, there's obviously a few. It's not to say that I only own one. I suppose Microsoft is a shovel in a gold rush, to be honest, if you just think about broader enterprise tech. So I guess it depends how far you take the concept.
But the one that I did want to talk about is Accenture. So I'm long Accenture. And then I bought the dip in Accenture and then the dip dipped a lot more in Accenture and so now I find myself down nicely this year, which is super irritating. I think what's extra irritating is that the shovel thesis is not what broke!
The whole idea with Accenture was to say, okay, this is the most tech focused of the management consultancies. All the corporates are busy looking at AI at the moment, at data, at unifying systems, at building these big data databases, for want of a better description, that they can then apply all the AI models to - I mean, it's just this brilliant recipe for success, in theory. And Accenture's growth despite that is not amazing. It is really not amazing.
But then there's something worse that's happened in the background, and that is DOGE and basically Trump and the whole story, so what that's done is that's really taking the shine off federal spending with Accenture, might I add, not necessarily as a whole, across all tech companies. I mean, just look at the likes of Palantir, how well they've done. And Accenture has actually announced that they're going to be working with Palantir going forward, which I suspect is just a desperate attempt to try and get closer to the current administration and figure out how to sell more stuff to them. Who knows, really?
So sometimes you can pick the shovel in a gold rush and actually just get it wrong, because something else goes wrong with that shovel. It goes back to my entire strategy with my portfolio, which has always been and will always be to avoid overly concentrated portfolio positions. I just simply cannot bring myself to have huge exposure to one stock. And Accenture is a great reminder of why, because technically, it's everything “right” per se - all the conditions are there for Accenture to do well, and yet they aren't doing well. And some of it is because of Fed spending, as opposed to anything to do with their core markets or AI or anything of the sort. So, you know, important lessons there, I think.
Mohammed Nalla: I think so, Ghost. I mean, it's important to note that there's no strategy that's bulletproof out there. And even kind of buying the company that sells the shovels in the gold rush can go wrong. And then you're left shovelling the proverbial, if you want to call it that.
Unfortunate there, but let's see? Maybe we need to actually go and do a deep dive into Accenture again. I know we did it some time ago and just unpack, is it actually something that's worth investing in, given that it's actually dipped so much more compared to where you got in? Of course, I don't hold any Accenture, so I'm quite happy about that.
I'm going to move on from the unpleasantries here, and I'm going to go into a name that's maybe slightly less conventional, but again, it's not one that's going to be foreign to our listeners I think. It's a company called Coinbase. Now, for those of you familiar with the entire crypto market, you're going to know who Coinbase is out there. But part of the thesis here is that a lot of people find crypto quite hard to digest, right? I mean, it's very volatile. You either love it or you hate it. And not all of us are out there buying bitcoin, buying Ethereum, you know, trading these very volatile coins that are out there. But I said: which is a company that's out there in the value chain that can benefit from this crypto ecosystem, but without taking that massive directional bet? I don't know if bitcoin's going up today or going down tomorrow, but I know that Coinbase as a platform, their crypto exchange and a platform, is effectively selling the shovel in the gold rush here.
So let's quickly wrap this up in terms of what they do. They provide the exchange, custody and compliance rails, they earn fees on trading and custody. And this is regardless of whether bitcoin, Ethereum, any of the other coins that are out there, there go up or go down. I would see the prospectors here being bitcoin, or any of the coins that are out there, and I would see Coinbase as the shovel company. And I like it because it's like Coinbase is out there as the store that sells the gears to the miners. And why Coinbase is that, effectively, you get an infrastructure play that comes through here, that comes through here. They are a custodian for a lot of ETFs, institutions, retail users, and this embeds them quite neatly in the overall crypto ecosystem.
If we look at another moat that a company like this has, they do have a regulatory moat, because compliance costs are fairly high in the US and Coinbase's regulatory positioning gives them slightly more credibility than other players that are out there. And it does make it harder for smaller competitors to scale. So, again, ticking the box that comes through there.
Another box that comes through would be diversification, because they've got revenue streams that go beyond trading. I've mentioned the custody services that come through there as well. And so I would look at this as the companies we've covered - MasterCard, Visa - they give you the rails that are out there in the payments world. I would see this almost as giving you some of the rails that are out there in the crypto world. And that's the reason why I've recently added a position in Coinbase into my portfolio.
It's one that I'm comfortable with for now. Let's see. You know, there is obviously a lot of hype. You got to look at valuations and so on and so forth. It is slightly more volatile because it does correlate with what's happening in the underlying crypto market to a degree. But for me, it's a way of de-risking my exposure but still getting an exposure to what I see as a mega trend that is out there.
The Finance Ghost: Yeah, that's one thing I wanted to say is you might not be taking a view on a specific crypto asset going up, but you're taking a view on crypto going up, full stop. Because Coinbase, like any exchange, is earning fees one way or another based on the value of the underlying things going through it. So if crypto becomes a lot more valuable, a lot more value is changing hands. They are taking their piece of that from a variety of sources and that's important.
So, perfect example of a shovel in the gold rush, in this case, the gold being crypto assets. And yeah, makes a lot of sense to me versus going and trying to figure out which of the coins, especially once you go outside of bitcoin, which of the coins might do well, where you and I Moe I don't think are ever going to be those guys.
Mohammed Nalla: Yeah, I mean, there are a couple of big names. There's bitcoin, there's Ethereum or Ether that's out there. But again, I think your point is very valid in that you've got to believe in the megatrend if you want to be the company that's selling the shovels into that megatrend.
And again, I think digital assets / crypto probably with us for the foreseeable future. It seems to be gaining a lot more momentum with concern around fiat currencies and so forth. And so I see this as a nice way - it's not a big position in the portfolio, but it is a position in the portfolio.
Ghost, I'm going to give you the last name because I can almost guarantee that no one on the show has heard of the stock. And if you have, please reach out to us on social media because I'd be very keen on for you to share your knowledge with me. It's one that popped up very recently on my radar. It's a company called Full Truck Alliance. Now, it's based in China. There is a US listing, The stock ticker is $YMM. And why do I see this as a shovel in the gold rush? We've spoken about eCommerce in China. We've recently covered stocks like JD. we've covered Alibaba - and China for me, yes, it's a thematic play, so again going to your prior point, you've got to believe in the China narrative here if you want to be selling shovels in China, almost quite literally.
So YMM is offering this digital marketplace that allows logistics players to then plug into the marketplace and then facilitate that movement of goods through China. The theme that comes through here is really I believe in the Chinese consumer. I think it's a large consumer market. We've covered some of the eCommerce players and again it's not clear to me, you know, whether Meituan for example outperforms JD or not. Again that's quite fluid. But I do believe in the mega theme and so that is why I'm looking for exposure.
I've just added this position into the portfolio. Again a small position. It is kind of speculative because again, slightly opaque when you're dealing with Chinese companies. Not as, let's call it transparent as you have in the US companies, but providing freight - that's road and trucks - into that eCommerce engine that is the Chinese consumer - that for me is selling shovels in the gold rush.
Now I just want to touch on a couple of key points here. There are some benefits that come through because they offer a platform. So again, it is an asset-light model, they don't own the fleets, they just make the money on facilitating transactions and services and this allows them to capture some of the value in that value chain without a high degree of capital intensity. So it ticks that box. Another box that it ticks for me is that you get network effects because as you get more drivers and shippers on the platform, it gives the overall platform some resilience. You've got stronger liquidity and pricing efficiency that comes through and that contributes to a moat for me. So that's another thing that I like. And then the last point is that we've discussed eCommerce, but there's also a data play that comes through here because as YMM actually scales, they can then monetise the data that they have by offering fuel discounts or insurance add-on products, cross-selling and this gives them a number of clips on the deal ticket further down the line, all contributing to what I would see as a long-term play here.
I'm not looking for quick wins on a player like Full Truck Alliance. I see this as a much longer-term play but it's an unconventional play that a lot of people haven't heard of just yet and I'm hoping it works out.
The Finance Ghost: Yeah, it certainly sounds interesting. I'll tell you one other thing to maybe look out for as a shovel in the gold rush at the moment is basically anything to do with the Hong Kong market. It's just something I've noticed is there's really been a huge uptick in IPOs this year in Hong Kong. And I don't know if that's because maybe China's realised that the whole region actually just needs to get a lot more business friendly to try and fight what's going on geopolitically.
Remember when the ANT Group IPO fell over? That was only five years ago and that caused a huge ruckus that really took the shine off a lot of Chinese valuations. Now it seems to have swung the other way where lots of new deal activity in Hong Kong, investment bankers moving there. It's just really interesting - this tends to be what seems to happen, now the gold rush is “Chinese listings in Hong Kong” - what is the shovel in that? Well, interesting question.
Mohammed Nalla: Yeah, I mean, Ghost. It's an interesting one because Hong Kong historically was always kind of the financial centre for anyone who wanted exposure to China. And then you had the fall from grace. Obviously, politically, Hong Kong was in Beijing's crosshairs, for lack of a better word. Maybe some of that skepticism has passed. There was a lot of China skepticism over the last two to three years. You saw that, you saw a lot of stocks bleed a lot of value. And so I would see this as a megatrend on people starting to warm up to the overall China story.
And why Hong Kong specifically is that Hong Kong has very well developed financial infrastructure. At the end of the day, that's really where people were getting exposure to China way back when. And obviously, yes, the rest of mainland China has kind of caught up to Hong Kong, but Chinese companies obviously see the value of Hong Kong as a capital market that is well recognised by Western investors. And so potentially that’s contributing.
Your question is certainly very important. I'm going to go and have a look at that because again, which companies stand to benefit from that? Are there Chinese banks or are we actually seeing Western banks for facilitating those IPOs? What are the advisory companies that come through there? All contributing to what I think we had on the show a little while ago, a fairly strong China thesis. I like that. I've been increasing my exposure to China, to the east in general, Japan also quite interesting there. And again, thematically, let's see if that plays out.
The Finance Ghost: Yeah, well, there's one other shovel in the gold rush that comes to mind for me, and that would be Prosus. And I know it's something I've talked about a lot before and written about a lot before, so I definitely won't go into huge detail here, but the gold rush there is basically that you've got tech outside of the US essentially, you've got a whole lot of platforms in markets that are quite interesting from a growth perspective. This includes places like South America, India, obviously South Africa. They've got some businesses there, but that's not really the focus. But what is interesting is they've actually got some stuff in Europe as well. And the whole thesis there is they will take AI enhancements and basically use that to try and find some more growth in some of these European countries.
They've just done a deal now in France, they've bought a classifieds business. It's essentially the AutoTrader of France. Doesn't sound like a super exciting business on paper, but when you think about the opportunity to do better data, better recommendations, etc. etc. then it just becomes part of that broader classifieds play which they have rolled up into OLX - that's the platform through which they've gone and now done this acquisition. But really the TL;DR there is just Prosus for me is a lovely thematic play on tech platforms outside of the US.
And like I said, you can really stretch the definition of the shovel in a gold rush. And that's where you have to be careful. That's probably a stretched definition because it's not like there's one thing driving all of Prosus, it's more a thematic play. And so that's when you have to be a little bit careful. But, you know, that one's worked out well for me. And then Accenture, which was theoretically the true shovel in a gold rush, has been very bad. So, you know, go figure.
Mohammed Nalla: Yeah, I mean, there's so much interesting stuff happening. What I like to do is when you look at a player that's kind of a conglomerate of stuff that's out there, I like to see what sectors they are doing the deals in. Are there other companies out there that might be interesting that I can get exposure to through the public markets? And again, last point, and then we can wrap the show is I say public markets because there's also been a raft of acquisition activity ticking up.
Very topical right now is EA Games, Electronic Arts. That's a stock we covered on Magic Markets Premium a long time ago, and that being taken private by a consortium of US and Arab investors. So pay attention because maybe there's something happening out there. Maybe there's a gaming gold rush that we don't know about. Just pay attention to some of those market moves because again, we had Microsoft buying Activision a little while ago. There's obviously something at play in that from a thematic perspective. And again, if you have the time to go and drill into what is the next gold rush or what are the respective gold rushes out there, you could actually find some pretty interesting shovels, I guess.
But unfortunately Ghost, that's where we've got to leave it. Let us know what you thought of the show. Hit us up on social media. It's @MagicMarketsPod, @FinanceGhost and @MohammedNalla all on X or go and find us on LinkedIn. Pop us a note on there. We hope you've enjoyed the show. Until next week, same time, same place. Thanks and cheers.
The Finance Ghost: Ciao.
This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.
