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The Asset Class: Anton Du Plooy · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  Rarely in recent years has an IPO caused such excitement.
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  I'm talking, of course, about SpaceX, the mega listing coming to a market near you
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  soon.
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  With me is Anton Deploy, analyst at 91 in Cape Town.
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  Anton, you've got this delicious combination of space, artificial
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  intelligence, Elon Musk,
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  and the word trillion, or even two trillion is being touted.
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  as an opening sort of market capitalization.
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  It really is quite something, isn't it?
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  Yeah, it's everything you want at this point in time.
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  I mean, the markets are pretty crazy as they are already.
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  And now we add all of this into the mix.
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  It's certainly going to keep us busy.
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  Yeah, it is.
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  Why is it so important?
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  And why is the timing so important?
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  And the reason I say that is because we've got an elevated AI sector of various
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  indices, and it's coming in.
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  riding the crest of that wave, I think.
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  Yeah, I mean, there's been a long debate we've been having both internally and
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  entirely across
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  the market around the
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  trajectory of AI spend and the question marks around bubble behavior and whatnot.
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  And there are obviously different views.
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  That's what makes a market.
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  But the timing of this is very opportune in that respect,
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  because it does bring to light a lot of the questions that we're currently facing.
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  As you stated, it brings in space, which is a big market, clearly, according to
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  Elon Musk,
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  and AI, which is everything that everyone wants at the moment.
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  So for us, it has a number of interesting implications, which we can talk through.
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  But certainly the topic du jour is AI.
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  Yes, and size is terribly important as well, which is what makes this IPO so
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  different.
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  But also what makes it different to me is the fear of missing out effect, because
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  two other AI companies are…
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  coming to the market as well, Anthropic and OpenAI.
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  Now, we can talk about that in the context of SpaceX as well.
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  But let's concentrate on SpaceX for now, if we can, because valuation, the
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  valuation is very glamorous, isn't it?
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  Yeah.
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  I mean, if you're sticking to SpaceX specifically, then yes.
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  I mean, that is an understatement of notes.
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  Just for some context, there are only 15 companies in the U.S.
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  that are worth.
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  over a trillion dollars, public companies.
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  And I say only, that number was a lot smaller not that long ago.
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  We were debating whether there could be any company reaching a trillion dollars.
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  But the fact that you've got SpaceX trying to list that a $1.75 trillion valuation
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  tells you that this is a big
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  deal.
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  And then clearly, as you stated, Anthropic and Open are falling shortly afterwards at
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  similarly high market cap
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  valuations or market cap sizes.
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  It's certainly an interesting time to be in the markets.
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  Yeah, it is.
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  It's an interesting allocation problem that people have got as well.
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  I had a very interesting conversation with a portfolio manager about a week ago,
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  and he said he's just noticing sort of jostling in the market, and he was
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  speculating as to whether that jostling was because people are making
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  money available for SpaceX and for the other two as well.
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  Do you believe that?
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  This is the debate we're having internally, and I would say that that
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  might be the case.
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  But at the same time,
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  the context of the market cap valuation being ascribed must also be considered
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  against the amount of
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  equity issuance that's being done.
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  And so while we talk about a $1.75 to $2 trillion valuation, the equity issuance is
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  only,
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  in inverted commas, $75 billion.
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  And so that means that you only are competing with that amount of equity that
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  you're having to reallocate from elsewhere.
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  That might be a partial factor at play.
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  But I would say that, you know, that dynamic probably only grows in time as we
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  have more of these listings come to
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  market and as the free float of these businesses grows.
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  The free float is tiny compared to other normal listings, if I can call them
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  normal.
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  Musk holding around 85% of the company.
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  Institutions not getting too much allocation.
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  Do you think there's going to be a mad scramble for stock if market conditions
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  stay as favorable as they are?
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  Yeah, I certainly think so.
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  I think it's been engineered as such, right?
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  And I think it's critical that for the market levels as they are, that this IPO
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  goes off well.
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  What is interesting around this IPO is that there are a few,
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  call it non-conventional practices that are being adopted,
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  one of which is the allocation to retail investors
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  pre-IPO, actually.
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  Retail is going to get 30% allocation pre-IPO through brokerage accounts,
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  which is unusual.
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  But nevertheless, we'll only stoke interest in the stock.
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  And the second of which is the fact that index providers have decided to loosen
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  their
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  rules around inclusion of companies as a consequence of these IPOs in order to make
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  sure that they get the flow
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  business, I presume.
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  And so what we are seeing is this dynamic where SpaceX and
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  OpenAranthropic, when they come to market, will be included in indices within the
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  first couple of weeks.
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  And that in and of itself will create a...
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  feedback loop where passive buying will probably begin active buying, which will
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  begin passive buying,
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  which will begin active buying, or engineer to get the stock price up in the
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  short term.
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  It's a very interesting line from a piece that you kindly sent me.
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  It says, the uncomfortable truth is a lot of active managers will end up buying it
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  for index hugging reasons, not conviction.
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  And your colleague Clyde Rousseau put it very neatly when he said, all the wrong
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  reasons to own something.
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  Do you go with him on that one?
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  I mean, I think, listen, taking a step back, what SpaceX has done and what they
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  can do is pretty incredible.
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  Some of the technical innovations cannot be ignored.
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  That being said, though,
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  the market cap valuation being ascribed is orders of magnitude higher than equivalent
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  businesses that trade in the U.S.
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  today.
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  And so that would lend some credence to that portfolio manager's view.
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  And for us, we are.
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  obviously taking a view on SpaceX in and of itself.
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  And where I would agree with that manager is that, yes, you know,
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  devaluation requires a lot of mental gymnastics to get your head around.
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  But what I would say is that the implications of this listing are quite
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  enormous if they get any of these big bets right.
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  And if they do get some of these big bets right, then Mr.
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  Musk is going to be the world's first trillionaire.
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  We know that even if they don't in the short term, he still might be.
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  How?
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  important is the Musk factor here?
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  Yeah, I mean, that's the only way you can get the valuation to work, right?
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  So we've done some work where we've looked at, call it similar sets,
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  and had a look at Tesla as an example, and where it trades relative to the Mag7
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  peers.
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  And Tesla for a long time has defied gravity in that, you know,
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  its fundamental delivery is not to the same level as its Mag7 peers,
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  and yet the valuation ascribed by the market is...
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  at a premium.
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  And so if you follow that logic, which I appreciate is tenuous as a fundamental
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  investor,
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  that could equally apply to SpaceX,
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  where the stock could have a trading value that is very different to what one would
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  conventionally think of as the
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  intrinsic value of that business.
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  And that might sustain for a duration of time.
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  Okay, let's move on now to the other two, Anthropic and OpenAI.
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  They're going to be trillion dollar listings as well.
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  This is all theory at the moment, of course, but it does look very likely.
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  What does this mean for active managers, passive managers?
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  Do active managers actually become or start behaving like passive managers
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  because they're being herded by
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  index mechanics?
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  There's all sorts of little intricacies going on here, Anton.
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  Yes, I would say that there's definitely this passive dynamic that we are trying to
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  get our head around,
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  given the mechanical impacts of passive buying and what that...
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  leads to in terms of share price performance, and then consequently,
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  what that leads active managers to do in order to head off, I guess,
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  benchmark risk, right, is the headline statement.
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  You know, what is interesting about these businesses is if they can maintain these
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  market capitalizations,
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  then in not too distant future, these businesses will be material on their
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  benchmark.
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  And so active managers will have to have a view on these stocks.
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  irrespective of whether they want to invest in these companies or not.
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  And that is kind of where it becomes quite interesting for us because we are boxing
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  these
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  stocks together or these companies together as trillion-dollar businesses and
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  questioning whether this is the peak of the
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  AI cycle.
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  But what I would say is that there are fundamental differences to these three
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  businesses and that the performance of these companies are
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  likely to be different.
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  as we move forward.
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  And it's our job as active managers to be able to determine which we think are
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  better investments for our clients.
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  But to your point about whether this will lead to some behavior by active managers
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  as a consequence of benchmark
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  sizing, I certainly think it will.
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  I had a very interesting conversation the other day with a large allocator,
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  and they are clearly having the same debate internally because they allocate a
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  large
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  portion of the capital.
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  in a passive manner and his big complaint was the fact that they were going to be
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  forced buyers
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  of SpaceX, despite the fact that they vehemently disagreed with the corporate
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  governance practices.
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  And so it is going to lead to some interesting behavioral responses by
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  participants
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  that are maybe not in line with call it traditional fundamental investing.
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  Okay, here's one for you, Anton.
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  AI naysayers, they may be split into two camps.
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  Now the AI naysayers may say, aha, this is a classic signal of the end of the AI.
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  bubble, it's going to burst now.
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  And they look back in history and say, this happened with the dotcom bubble, etc.
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  Clearly very, very different situations.
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  But that's what people might be thinking.
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  Or they could behave this way.
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  They could say, I wasn't quite convinced about AI, but now I am.
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  Which one do you think might prevail?
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  So when I look at it, right, I,
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  so we often have this in this dynamic remark where people like to look back at
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  at high historical moments.
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  and draw conclusions to today.
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  And I'd say that on the one hand, you know, you could agree with that approach
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  because of the behavioral mechanisms of the market
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  and participants within that.
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  But on the other hand, you could say that, listen, for something to be statistically
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  significant, you need 30 data points.
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  And so with that caveat in place, I would say that I'm in the camp of, you know,
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  if this is an AI bubble, then we only at the, call it the beginning of the end.
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  And why I say it is when you go back to the dot-com bubble, you know, which was
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  the,
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  call it the poster child of the technological evolution that was the
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  internet.
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  And that was Netscape.
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  And when did Netscape IPO?
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  When Netscape IPO in 1995.
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  When did the dot-com bubble pop?
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  In 2001.
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  And so you had six years of very strong market performance post the IPO of what
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  was the
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  technological innovate at the time that led to the boom in the internet.
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  So, there's, you know, clearly the view by some of this marks the top, whereas, you
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  know,
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  my perspective is more like if this marks the top, it's the beginning of the top and
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  we still got some way to go.
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  Very final question.
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  How are you going to behave at 91?
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  We're looking at the business from a bottoms up fundamental perspective.
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  And we are debating very much, you know, many of the things that you've brought up
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  around one, you know, does the valuation make sense,
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  given the fundamentals of the business?
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  And then two, clearly thinking about the flow dynamic, because particularly in the
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  US,
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  that is a consideration that we can no longer ignore, given the nature of the
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  participation in the US market.
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  And so we actively evaluate the fundamentals, and we'll make a decision
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  appropriately for our clients.
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  What a delicious prospect, as I said in my introduction.
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  Thank you very much for describing it so well, Anton.
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  Anton Deploy is an analyst at 91 in Cape Town.
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  The views and opinions expressed in these podcasts are those of Lindsay Williams and
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• 13:14
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