At our Motley Fool Founders Summit event in Denver in October, The Motley Fool's Chris Hill talked with analysts Aaron Bush, Bill Mann, and Matt Argersinger about some of their favorite, founder-led, global investment opportunities. Those companies include Ubisoft Entertainment (NASDAQOTH: UBSFY), iQiyi (NASDAQ: IQ), Yandex (NASDAQ: YNDX), Constellation Software, Pro Medicus (ASX: PME), and Yume no Machi Souzou Iinkai (TYO: 2484).
Chris kicked things off by asking Matt about a company that's been called the Netflix (NASDAQ: NFLX) of China. Check out the video below. Or if you prefer, check out the transcript.
A full transcript follows the video.
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This video was recorded on Oct. 1, 2018.
Andy Cross: I'm Motley Fool Chief Investment Officer Andy Cross. At our recent Motley Fool member event in Denver, Colorado, The Motley Fool's Chris Hill talked with analysts Aaron Bush, Bill Mann, and Matt Argersinger about some of their favorite global investment opportunities. Chris kicked things off by asking Matt about a company that's been called the Netflix of China.
Chris Hill: Alright, let's move on to the stocks themselves. You guys just jump in. iQiyi.
Matt Argersinger: Yes, iQiyi, a company that actually just came public earlier this year. It's been called, in a lot of contexts, the Netflix of China. I hate using those lazy monikers, because I use them too much, but I'll use another one -- I tend to think of it as the YouTube of China more because it derives about 50% of its revenue from advertising on free videos that people watch, and there's advertising with that. The other 50% is premium subscriptions.
This is a business that, last quarter, grew its subscriber base 75% to 67 million. It's growing tremendously. It was founded by Tim Yu in 2010. Baidu took a controlling stake in 2012. Then it was spun out of Baidu, at least partly, earlier this year. Baidu still controls roughly a 60% stake in the business. You look at the market cap of the business, $17.6 billion. Comparing that to Netflix makes you think, "Wow, there's some opportunity here," because Netflix is about eight or nine times bigger. You look at the market of China, and it looks bigger.
But, there is some competition for iQiyi. Tencent video is a big competitor. Alibaba also has an online video business. But in my mind, and I think in our minds, iQiyi has the lead. They've got, of course, the Baidu pedigree, the Baidu data and artificial intelligence that's really driving a lot of their content decisions. And in 2017, I thought this was tremendous, 42 of the top 50 viewed videos, films, movies, TV shows in China were either owned or distributed by iQiyi. That gives you some indication of their dominance in the market.
Bill Mann: It really can't be overstated culturally how different videos, help videos and things like that, are viewed in China than they are in the United States. They are very, very heavy consumers of these exact type of content that iQiyi dominates.
Aaron Bush: The next stock is Ubisoft Entertainment. This is one of the world's largest video game publishers, based in France. Their primary listing is on the Paris Exchange, but they have a quality ADR that trades in the U.S., too.
This company is behind some of the biggest franchises in video games: Assassin's Creed, Far Cry, they own the rights to Tom Clancy for games, and there are lots of franchises associated with that. They have lots of other games, too. This is a company that truly is founder-led. It was founded by five brothers. One of the brothers is still the CEO, and several of the other brothers continue to have executive positions at the company. They've had quite the ride. It's becoming a $10 billion business.
This is a company that has struggled a decent amount until just about a couple of years ago, where they really started hitting their stride. Some of their franchises were waning. Gamers were losing interest. They decided to make a pretty bold decision, where they were going to produce less games each year, but double down on the quality of those games. That actually has worked out incredibly well. Even though they produce less games a year now -- and they'll make more games over time -- they actually make more money from those games than they used to. Part of that is through digital expansion, part of that is people being engaged for longer.
Also, for many of you who might have invested in Activision Blizzard in the past, this might be a bit of deja vu. Vivendi, until earlier this year, had a pretty big position in Ubisoft, and they struck a deal similar to Activision to sell their entire position. The founding brothers are buying in more. Tencent is coming in as a strategic partner. They're going to have a big share buyback over the coming months associated with that.
This is a company that still has a lot of opportunity. They're going to produce more games. Digital is a huge tailwind. Because they're smaller than EA and Activision, a smaller percentage of their revenue is digital, but gaming is going to be 100% digital, so that's just going to be pure upside. Tencent, expanding into China is going to be a huge deal. They have a great partner there. It's also going to help expanding into mobile games, which they have a tiny presence in. E-sports. There are just a ton of talents here that I think can make this business a lot bigger over the next decade.
Argersinger: And it's based in France. Not to trump Bill here on Canada, but you can find growing, entrepreneurial, founder-led businesses coming out of France. Who would have thought?
Hill: [laughs] Yandex. Speaking of which...
Argersinger: Oh, here we go. Yandex. Hopefully, if there are any Rule Breaker subscribers out there, you might be familiar with this company. This is the leading search engine in Russia. They have about a 56% share of search in Russia. They've done a good job over the years of fending off Alphabet, although Google has certainly gained a little bit of ground in the marketplace.
This was a company founded by Arkady Volozh and his partner Ilya Segalovich in 1997, which is a little before two guys named Larry Page and Sergey Brin started a company in a garage. This company's been around and was doing search well before Google was. They've had an interesting rise as a company. They've obviously benefited from the growth in advertising in Russia. They've also expanded in a lot of different areas, one of them, which is exciting, is Yandex. Taxi, which is their ride hailing business, which recently merged with Uber. Now, they dominate the ride hailing and food delivery business in Russia.
It's an incredibly volatile stock. Being in Russia, there's always, of course, the threat --
Mann: Of Russia.
Argersinger: The threat of Russia. Yet, we looked at this business, and we thought the risks were worth it. We think there are a lot of exciting things the company's doing, not just in search and ride hailing and things like that but in e-commerce, fintech, video, other areas.
Mann: They've also launched something called Yandex. Market along with Sberbank, which is essentially the PayPal of Russia. They have their fingers in a lot of really great businesses. And Yandex was one that we really talked about a lot. This is a company that, I don't know that any of us would jump up and down with excitement about investing in Russia, but this is a company that is really great in spite of the fact that it's in Russia. And the hurdle for us to put Yandex in the portfolio was rather large.
Hill: Constellation Software?
Mann: I love these graphics, by the way! It's really good!
Bush: Google Images.
Hill: I didn't do that.
Mann: Constellation Software, I will take a line about this that's sure to be mocked, and I'm not going to make fun of Canada. Constellation Software is the Berkshire Hathaway of software companies. They've been around for nearly 20 years. They've had a 25% return on capital, a 20% plus stock return every year since then. The reason that they've been able to do it is that they have been acquiring other software companies. They have very specific rules. These rules might sound familiar to you all. They want companies that are trading at 5-6X sales. They want companies that are founder-led. They want companies that have a very long on-ramp in front of them that could benefit from being drawn into a larger company with certain scale.
This is an amazing company. They did 60 acquisitions in 2017 of small companies, and they're on pace to do that again this year.
Bush: PRO Medicus is a small Australian software company. They sell medical imaging software-as-a-service primarily to radiologists. As you can imagine, doctors, hospitals have shifted away from film to digital. But even now, often the systems that help manage all the images, they have to manage an assortment of different systems. And a lot of times, the data that they have to work with is still stored on-site. It's a very inefficient method for doctors and hospitals to work with. PRO Medicus has come out, and they've continued to build their software suite around simplifying and bringing together a lot of the different pieces around storing and streaming and sharing and getting intelligence out of medical images.
The technology that goes into this is incredibly complex, actually. Sam Hupert, the founder and CEO, he owns about 28% of the business, he claims that their technology is 18-24 months ahead of the competition. That shows in the numbers, too. The growth that this company is seeing, they continue to strike big deals around the world. A lot of upside for a small Australian company is being able to scale out of its core market and start to strike big deals in Europe and North America. And they're doing exactly that.
It's a great founder, great technology, we're seeing great growth. If this was like a lot of other software companies that we've seen in the U.S., you might imagine, "They're probably burning a lot of cash to invest in R&D and scale their sales force." No. Over the past fiscal year, one-third of their revenue converted into profits, which lets them invest heavily. They actually pay a dividend in spite of their pretty heavy growth. This is a company that checks a lot of boxes for us, and I'm really excited about it.
Mann: I'm pretty excited about this. Can you say the name of the company?
Female: I'll say... (unclear 10:46).
Mann: Love it, close enough! Yume no Machi Souzou Iinkai. It's Japanese, and it means We Will Build A New Village, which is either the most high-minded company name I've ever heard or the dumbest. I'm not sure which. I love this company! This is the Grubhub of Japan. There's some really interesting things that are going on in Japan. It's been a fairly stagnant market for about 20 years. But in the last five years, the Prime Minister of Japan has tried different ways to get the country to begin economic growth again. And one of the easiest things that he picked that they could do was to get more Japanese women into the workforce. Now, there's a huge problem there, a huge impediment for keeping Japanese women from getting into the workforce -- none of the infrastructure exists for two-income households. There are things that just don't exist. There aren't enough day care centers. There's just not a lot of things in place.
So, in that environment in which the government is trying to push households to bring women into the workplace, we have a company that does food delivery. It's a country that is dominated by small mom-and-pop restaurants, so they don't have the infrastructure in place to do it themselves. This is a fantastic business for the restaurants themselves, a fantastic partner for them.
Only about 2% of the total population of Japan used any service like a Grubhub. Yume no Machi's service is called Demae-kan. Absolutely wonderful company, run by and founded by a woman named Rie Nakamura who was very much ahead of her time in terms of the technology it takes to set up a network like this.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Aaron Bush owns shares of Activision Blizzard, Alphabet (C shares), Baidu, Electronic Arts, Netflix, PayPal Holdings, Tencent Holdings, and Yandex. Andy Cross owns shares of Berkshire Hathaway (B shares) and Netflix. Bill Mann owns shares of Berkshire Hathaway (A shares), Berkshire Hathaway (B shares), iQiyi, and Yandex. Chris Hill owns shares of PayPal Holdings. Matthew Argersinger owns shares of Activision Blizzard, Alphabet (C shares), Baidu, iQiyi, Netflix, and Yandex. The Motley Fool owns shares of and recommends Activision Blizzard, Alphabet (A shares), Alphabet (C shares), Baidu, Berkshire Hathaway (B shares), Netflix, PayPal Holdings, Pro Medicus Ltd., and Tencent Holdings. The Motley Fool owns shares of SBERBANK OF RUSSIA S/ADR and has the following options: short January 2019 $82 calls on PayPal Holdings. The Motley Fool recommends Electronic Arts, iQiyi, Ubisoft Entertainment, Vivendi SA, Yandex, and Yume no Machi Souzou Iinkai. The Motley Fool has a disclosure policy.