Why a Long-Term Investor Is Sticking With Tesla and Cloud Stocks -- Barrons.com
Everything about the investment approach at Baillie Gifford screams patience. Founded more than 110 years ago, the Scottish portfolio management firm, which oversees $250 billion, is a believer in the power of long-term growth investing. "We think it's easier to spot significant points of change -- and to ride the sometimes bumpy road toward them -- than to try to second-guess other investors quarter to quarter," the firm says on its website.
That philosophy was put to the test in 2022, as tech stocks suffered their worst year since 2008. Riding point was Dave Bujnowski, who co-manages the firm's U.S. equity growth portfolio. While Bujnowski says last year's experience forced him to challenge his assumptions -- the U.S. fund fell more than 50% last year, after returning an average of 43% annually in the prior three years -- he is unflinching in his view that Baillie has the right approach in making long-term bets on the power of change.
Bujnowski recently spoke with Barron's via Zoom from his home in Connecticut about why he remains a true believer in the power of change-driven growth, why he still likes cloud stocks, and why he remains a bull on Tesla (ticker: TSLA). An edited version of the conversation follows.
Barron's: Last year was brutal for growth-stock investors. Are you more bullish than a year ago?
Dave Bujnowski: After last year, it is critical to assess the underlying issues. Are they about valuation? I have no insight into what's going to happen to valuations in 2023. But I do know that valuations are more compelling than they were a year ago. On the other hand, if a company's market opportunity is saturated, it's the end of the road. On balance, it feels like a good setup for the next five years.
It's fine to have the long view, but how do you navigate now?
Our approach hasn't changed. Our average holding period is six to eight years. We're genuine growth investors. We believe wealth creation comes from investing in great growth companies over long periods. We navigated by keeping our philosophy and time horizon at the forefront.
One of our pivotal moments came at an internal meeting last spring, when we asked ourselves: What really matters? At the time, Wall Street was focused on macroeconomics, the Fed, inflation, geopolitics, and the supply chain, all for good reasons. But if you have a time horizon of more than five years, is that what matters most? The question that I thought mattered most was: Are the engines that powered this amazing 13-year period for growth stocks still intact?
You recently wrote a paper addressing that question. But the world looks a lot different now than it did just a few years ago, with the Federal Reserve aggressively raising rates to fight inflation.
Sure, that's the starting point. Then we asked whether the same growth engines are still in place or whether they were depleted, and whether new engines were emerging. I had an open mind, thinking that if the old engines were depleted, we'd have to own up to that and reflect that in how we invest. There's a temptation to define growth by the expansion of a system, economic or otherwise, but I have always associated growth with change. Change and dynamism lead to growth opportunities as much as expansion itself.
So, change is key, not GDP growth?
Our style is to identify where big changes are taking place, and the companies best positioned to take advantage. Growth happens when supply and demand meet in new ways. I found three separate growth patterns: one in which demand is growing; one which has to do with supply changing, with innovation meeting demand in new ways; and the third in which demand doesn't grow, but something else happens to create new opportunity.
Give us some examples of the first.
One involves macroeconomic conditions, in particular a low cost of capital, which can lubricate the whole system and drive demand for everything. A more specific example is mobile broadband. As high-speed wireless access reached more people and more merchants entered the system, there were more mobile transactions, and the system grew. Another is software as a service, where a new pricing model unlocked demand that otherwise wouldn't have been awakened. Some customers couldn't afford this software under the old software-licensing model.
Where is the change engine still humming?
Take data science. Companies are unearthing and collecting new data sets and solving problems that we didn't know had solutions. New data sets are emerging in the life sciences, for instance, and from new space technologies like low-earth-orbit satellites.
How are you playing the trend?
The clearest opportunity is in life sciences. Consider what Moderna [MRNA] is doing with the data that can now be collected from the human body, with DNA sequencing from companies such as Illumina [ILMN], addressing problems core to humankind. It starts with creating vaccines for the pandemic, but that doesn't end it. 10x Genomics [TXG] is doing sequencing at the single-cell level. We own all three stocks.
You also have a big position in the cloud-based data-analytics company Snowflake [SNOW]. The stock came public in 2020, achieved an enormous valuation, and then fell almost 60% last year. It's still not cheap. What's to like?
It is one of the most expensive stocks in the software universe based on near-term valuation metrics. But start with the current pace of growth: Product revenue grew by 67% in the October quarter. I look at the value Snowflake is offering to customers, and the momentum it has inside its customer base and with customers, and I see an extremely large opportunity. It has an ability to turn data into meaningful insights in a way no other company has. Sure, in an economic slowdown, its customers will run fewer projects and consume less computing resources. But that has more to do with the current economy than long-term potential.
Are other cloud stocks appealing?
Historically, one of the challenges in enterprise-software investing has been that in a period of rapid innovation, it is hard to find companies that have durability. We look for companies that will still have a competitive advantage in year six or seven or eight. That has been difficult, because new technologies tend to leapfrog the old ones, and it makes it hard for incumbents. Three we like are Datadog [DDOG], Cloudflare [NET], and HashiCorp [ HCP].
Like Snowflake, all of those stocks were battered in 2022, with losses in many cases north of 60%. Datadog provides observability software, which helps customers monitor and fix their infrastructure. That's a crowded market, and the stock is pricey, even after the recent slide.
Yes, Datadog has competitors, but most of them weren't born in the cloud, and being a cloud native counts for a lot. Another factor is Datadog's pace of new-product innovation. The same goes for Cloudflare. If you come to customers with an ever-broadening suite of products, you can sell them more software and they can work with fewer vendors.
Cloudflare started as a content-delivery network. Why do you see a bigger play?
Right, they started as a CDN, but evolved into something much greater, adding firewalls and VPNs [virtual private networks], protecting from DDoS [distributed denial of service] attacks, offering intrusion prevention, and more. They have moved tools that were originally on-premise in data centers to the cloud.
Why do you like HashiCorp?
It provides tools to make it easier for the Global 2000 companies to migrate computing resources to the cloud. HashiCorp helps customers secure, connect, and run their most important applications. It has a freemium model: It gives away an entry-level version of its software and is converting more and more of those users to paying customers.
Baillie has been a large holder in Tesla, whose stock fell about 70% in 2022. What is your take now?
Electric vehicles are a great example of a disruptive growth engine inside a system that isn't necessarily growing. A new type of supply enters the market and meets demand in a new and better way. They are stealing market share from combustion-engine vehicles. We're believers in EVs. There's a $4 trillion market globally, with a new product, and buyers finding more reasons to own them. EVs have gone from about 1% of the market in 2016 to 10%-12% now.
We are still enthusiastic about Tesla. A few years ago, the debate was whether Tesla could ever make money. They've proven they can. Now, the questions are around [CEO Elon] Musk and his involvement in Twitter and his lower engagement with Tesla.
I'm relatively relaxed about his engagement level with Tesla, for two reasons. One is that he's always had multiple big endeavors, and has shown he has the capacity to do more than one job. More important than that is the culture he has created at Tesla -- a culture of innovation, of being able to build this manufacturing machine that can produce cars at scale like no one else can. The company can basically run itself day to day without Elon.
Do you worry that his actions around Twitter are damaging Tesla's brand image?
We're being watchful. For every person who says they don't want a Tesla because of Elon's behavior, it shrinks the addressable market by one. And that shouldn't be overlooked. On the other side of the debate -- and this is why we are still enthusiastic about Tesla -- this is an absolutely massive market. So, even if some cohort of potential buyers decides they don't want Teslas, there is still plenty of room to grow, and their competitive advantage goes well beyond brand.
Would you feel better if he picked someone else to be Twitter CEO?
He said that he is planning to do that. I'd support anything that would have him less in a divisive spotlight. And would I rather have him more engaged with Tesla? Yes, I would prefer that.
Do you own other EV stocks?
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January 06, 2023 03:30 ET (08:30 GMT)
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