Dear Partners,
We are pleased to report that Rowan Street posted a gain of +26.2% (net of fees) during the first half of 2024, outperforming the S&P 500 Index, which advanced +15.3% over the same period. Over the last 12 months, ending June 30, our fund has delivered a return of +43.2% (net), well ahead of the S&P 500’s +24.6%.
Since 2022, our portfolio has rebounded by 155.7% (net). However, we still have ground to cover before reaching the high-water mark set in June 2021. As a reminder, the high-water mark ensures we only earn performance fees on gains that exceed the highest previous value of your investment, protecting you from paying fees on recoveries after a decline. Consistent with this principle, we have not collected any fees from investors who experienced the drawdowns in 2021-22, as we do not charge fixed management fees. From day one, our fundamental belief has been that we should only be compensated when we make our investors money. This approach, which we consider the fairest, ensures our interests are perfectly aligned with yours.
Our objective remains to restore our inception returns to double-digit levels — a goal we’ve been committed to since day one. We invite you to continue reading, as we’ll outline our strategy for achieving this in the remainder of this letter.
All of our portfolio companies have now reported their earnings for Q2’24, and we are happy to report that this was an exceptionally strong earnings season across the board. As of the end of August, our fund stands at +33.1% (net) year-to-date.
The primary drivers of this performance in 2024 include contributions from key holdings such as Spotify (+82%), Meta (+48%), Trade Desk (+45%), and Topicus (+47%). However, Shopify was a drag on our performance, with its stock declining by (-15%) through the end of June. The stock has since rebounded strongly on the back of a robust earnings report and is now only down (-5%) year-to-date (please refer to the table below).
As you’ll see from the historical returns of our core holdings, stock prices can exhibit volatility in any given year, often dictated by Mr. Market’s unpredictable temperament. These mood swings have been particularly pronounced in the last three years. But remember, the underlying fundamentals of businesses seldom fluctuate to the same degree. Over the long term, stock prices will eventually reflect the true value of the businesses they represent.
In our original letter back in 2015, we laid out a simple vision:
Our aim at Rowan Street Capital is to build something special—where partners can see themselves as co-owners of a business they expect to be part of for a long time… our goal is to assemble a portfolio of great companies that will compound wealth at double-digit rates over the long term.
Today, we can say we’ve stayed true to that vision. We believe that our portfolio is composed of some truly exceptional businesses, and in our opinion, each managed by some of the best owner-operators in their industries. The way we look at it is building a portfolio is akin to creating a work of art. It’s taken nine years of dedication, filled with successes and, yes, our fair share of mistakes. But each misstep has been a steppingstone, paving the way to where we are today. Though investing is never without its ups and downs, we are very pleased with the portfolio of companies we have in place.
As we look forward to the next 5-10 years, we are filled with optimism. We believe that our portfolio is strategically positioned to seize the opportunities ahead. While the road won’t always be smooth, the strength and resilience of our businesses give us confidence that we’ll continue to create long-term value for our partners.
On average, our portfolio companies, based on current analyst estimates, are projected to grow revenues by 15% per year over the next three years, outpacing the 4-6% revenue growth expected for the S&P 500. More importantly, earnings for our companies are estimated to grow at an impressive 32% annually over the same period, driven by enhanced projected profitability from key holdings like Spotify, Trade Desk, Shopify, and Netflix. Even if the market chooses to lower the multiples on these businesses in the future, there is a good probability that strong revenue and earnings growth should still allow us to deliver solid returns.
Our long-term approach remains unchanged: to continue being long-term owners of what we believe are the most outstanding businesses we can find, to avoid overpaying for them, and to allow them to flourish and compound value for us over time. While the last part sounds very simple, in practice, it's the most challenging. To succeed in investing, you have to do something others aren’t able or willing to do. In today’s fast paced world, investors find it very difficult to be focused and patient. Therefore, our focus, patience, and unwavering conviction in a few select holdings — which we work very hard to uphold — may well be our greatest edge.
PORTFOLIO UPDATE
In this section of the letter, we would like to provide you with an update on the business progress of our top 5 largest holdings: Meta, Spotify, Trade Desk, Topicus and Shopify. As always, our focus remains on the long-term value creation of these companies, and not on any particular quarterly results.
Meta Platforms (META)
We are pleased to report that Meta Platforms, our largest position in the fund, has delivered a remarkable performance, +450% since our November 2022 note. Our investment in Meta dates back to 2018, with an average cost basis of approximately $172 per share. Today, the stock trades around $535, reflecting a 3x return over the six-year holding period, equating to a 20% annualized return.
We would like to remind you that achieving these types of returns is never a straight path. From time to time, we might experience volatility — that’s simply part of the investment journey. In fact, wealth creation and volatility go hand in hand. There’s no escaping it; it’s the "price of admission" the market demands. If you take a look at the chart below, you’ll notice the drawdowns META stock has faced over the years, with 2022 standing out as a particularly challenging period, where the stock saw a 75% drop.
Source: finchat.io
However, if we were to tune out the market’s volatility (and the emotions that inevitably come with it) and focus solely on the fundamentals of the business with a long-term perspective, the results are quite impressive (see key performance data below). Over the course of our six-year ownership, the growth in revenue, earnings, and free cash flow per share closely mirrored the strong returns we achieved from the stock.
Source: SEC Filings, Rowan Street Capital LLC
Q2‘24 results update (source: company quarterly filings):
We were pleased with Meta’s robust progress in its financial and strategic position. There are now 3.27 billion people that use at least one of their apps each day. In Q2, Meta achieved a 22% year-over-year increase in revenue, reaching $39.07 billion, and net income rose by 73% to $13.47 billion, surpassing analyst expectations. Key to this growth is their significant investment in artificial intelligence, particularly with the development of their Llama 3.1 model. CEO Mark Zuckerberg envisions Meta AI as potentially the most used AI assistant globally by year-end, although monetization will take time. AI integration has also bolstered their advertising revenue, which grew to $38.33 billion, demonstrating its effectiveness in optimizing their core business. Their “Family of Apps” core business posted a $19.3 billion operating profit in the quarter, which resulted in a very impressive 50% operating margin — we don’t often come across businesses that put up those kind of margins. The company has also increased its capital expenditure forecast to $37-40 billion, underscoring its commitment to AI infrastructure. We believe that Meta's strategic focus on AI and open-source initiatives positions it well for future success.
Spotify (SPOT)
Back in our 2022 year-end letter, we highlighted Spotify, which was trading at roughly $15 billion at the time. We asked the question: “Does this valuation make any sense?” Now, just 18 months later, Spotify is valued at about $68 billion — a 4.3x increase. To put this in perspective, we initially estimated a valuation of about $70 billion by 2025, and it seems we got there a bit faster than anticipated.
Spotify went public in 2018 at a price of $132 per share. We began purchasing shares that same year and continued to add to our position as the stock appreciated. Today, Spotify trades at $337 per share, reflecting a total return of 155% since its IPO, or about 16% annually — quite a respectable performance. However, our average cost basis is $216, as we increased our position as the stock rose. As a result, the stock return from that cost basis stands at 58%. While it's somewhat disappointing in comparison to the overall gain since the IPO, we remain confident in the position we’ve built, given the company’s strong long-term growth and profitability potential.
Spotify’s rise in stock price has been far from a smooth journey. Take a moment to consider the drawdowns since its IPO. Much like Meta, Spotify faced an 80% decline in 2022 — an experience not suited for the faint of heart. We stayed with it…
Source: finchat.io
…and focused on the actual fundamentals of the business, where Spotify performed quite well over time. Active users and premium subscribers have grown at an impressive pace, while both revenues and gross profits have increased at an annual rate of over 20%.
Source: SEC Filings, Rowan Street Capital LLC
Although the free cash flows have been relatively flat until 2023, the company has recently become a strong cash generator as you can see from the chart below.
Q2 results update (source: company quarterly filings):
Spotify achieved record profitability, reporting a net income of €274 million and a 20% year-over-year revenue increase to €3.8 billion. Gross margins improved to 29.2% — an all-time high — underscoring the company’s efforts to boost efficiency. Premium subscribers grew 12%, reaching 246 million, while monthly active users rose by 14% to 626 million. The company’s operating income surged to €266 million from a loss of €247 million in Q2 2023, reflecting Spotify's recent focus on cost efficiency and monetization strategies, including a streamlined podcast strategy and enhanced ad revenue initiatives.
The Trade Desk (TTD)
We have owned TTD for a little over 4 years now, opportunistically establishing a position in March of 2020 at a cost basis of $17.40 (split-adjusted). Since then, TTD has appreciated nearly sixfold, delivering an annualized return of approximately 55%. These are indeed remarkable results, but it’s important to recognize that this journey has been far from a smooth ride—much like many of our other investments. Since its public debut in 2017, the stock has experienced several significant drawdowns, with the most notable occurring in 2022 when it declined by over 60% (see below).
Source: finchat.io
As we have previously discussed in relation to our investments in Meta and Spotify, one would have to be comfortable with sitting through these dramatic drawdowns and keeping their emotions in check in order to realize the long-term rewards of compounding that this company had delivered.
Turning attention to the fundamentals of the business rather than gyrations of stock prices, the progress is very impressive as evidenced from the numbers below. Over the 4 years, revenues, operating earnings, and earnings per share have each grown at a rate of 30%+ annually. Our return from holding the stock has been even greater than that since we were able to opportunistically purchase the stock when it briefly traded at 10x revenues during the early days of the pandemic scare. The multiple has now recovered to 20x revenues, which boosted our returns.
Source: SEC Filings, Rowan Street Capital LLC
Q2 results update (source: company quarterly filings):
In The Trade Desk's latest quarter, the company reported a revenue of $584.6 million, marking a 26% year-over-year increase, which exceeded analyst expectations. Adjusted EBITDA came in at $229 million with an impressive 39% margin.
CEO Jeff Green emphasized the company's strong position in the digital advertising ecosystem, particularly in Connected TV (CTV) and retail media. He highlighted that their success is driven by the shift towards data-driven advertising and the growing adoption of their Unified ID 2.0 solution, which is seeing broad industry support.
Topicus (TOI.V)
As a reminder, Topicus is a Dutch company that acquires, manages and builds vertical market software (“VMS”) businesses, primarily located in Europe. Generally, these businesses provide mission critical software solutions that address the specific needs of their customers in particular vertical markets.
Topicus was spun off from Constellation Software, a Canadian company, in February 2021. Constellation Software established Topicus.com Inc. as an independent publicly traded entity and merged it with its subsidiary, Total Specific Solutions (TSS), a key player in the European VMS sector. We took a position in Topicus shortly after its spin-off, with an average cost basis of CA$70.19. Currently, the stock is trading at CA$124, reflecting a 19% annualized return over approximately 3.5 years holding period.
Our investment returns have closely mirrored the growth rate of revenues, operating income and operating cash flow per share (see below):
Source: SEC Filings, Rowan Street Capital LLC
If you take a look at the graph below, which shows the trailing 12 months data, you’ll notice that Topicus has seen a significant increase in cash flow generation in 2024 — doubling from the levels that we observed back in 2021. This is a result that we’re certainly pleased with. However, the pace of acquisitions has noticeably slowed. This indicates that management is finding fewer attractive opportunities in the current market. We have confidence in their judgment and expect them to continue being disciplined in their acquisition strategy.
Shopify (SHOP)
Shopify has been an incredibly rewarding investment for those lucky enough to get in early after the company's initial public offering (IPO) in 2015. The shares have delivered a return of 2,600% or 42% annual. Its revenues have grown at 49% per annum since the end of 2014 from $105 million to estimated $8.6 billion in 2024. The massive e-commerce market is a huge opportunity, as the company's growth indicates. As you tell from the chart below, revenues are forecasted to grow above 20% for the next 3 years. Keep in mind, Shopify has been around for more than a decade — and it's still growing at these high rates.
We have owned Shopify for only 2.5 years, establishing our position in the first quarter of 2022 at a cost basis of $60, after the stock collapsed from its highs of $169 in November 2021. In hindsight, our entry may have been a bit premature, as the stock continued to plunge, eventually reaching a low of $27 in October 2022. However, such market movements are inherently unpredictable, and we seized the opportunity to invest in a company we had long admired.
As you can see in the chart below, the drawdowns for SHOP over the past five years have been dramatic, with the stock dropping over 80% in 2022:
Fast forward to today, the stock trades at $75 — a 25% return for our holding period or 9.5% annual, which is a bit disappointing so far. However, our holding period for the stock is still relatively short and we are optimistic about the long-term growth prospects of the company. If we turn to the fundamentals of the business, Shopify had put up some very impressive growth numbers in the past 2.5 years that we had owned it (see table below):
Source: SEC Filings, Rowan Street Capital LLC
Q2 2023 update (source: company quarterly filings):
Shopify's stock surged close to 25% following a strong second-quarter earnings report that exceeded expectations on both revenue and profit. Revenue increased by 21% to $2.05 billion, surpassing the forecast of $2.01 billion, and gross merchandise volume rose 22% to $67.2 billion. The company also reported a significant rise in free cash flow and improved gross margins, aided by higher subscription prices and the sale of its logistics business. Additionally, Shopify provided optimistic guidance for future revenue growth and margin expansion, further boosting investor confidence, leading to the sharp rise in the stock price.
As always, it’s a privilege to manage your capital, and we deeply appreciate the trust and confidence you place in us. We hope you have enjoyed your summer and we are always around if you would like to chat.
Best regards,
Alex and Joe
DISCLOSURES
The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our Fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot assure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee The top 5 will continue to perform and, more generally, there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees.