Quarterly Letter, EIP
Quarterly Letter from Co-Chair, EIP, Q4 2023
Dear Sponsors, Board of Advisors, Members and Readers,
I'm Gaius, one of the new Co-Chairs for EIP. I'm excited to be writing this quarter's letter and to share what's been happening in the club. With the publication of many of our 2H initial memos in this quarter, we've seen many new opportunities discovered and I'm happy to share that our portfolios have seen quite a few new positions initiated. I'll talk about some of the changes in our portfolio below.
Initiation of New Positions
AutoZone
AZO is a retailer and distributor of automotive replacement parts & accessories, mainly in the US (6,300 stores) and growing presence in Mexico (740 stores) and Brazil (100 stores). In short, AZO sells aftermarket vehicle parts, and do not derive any revenue from repair or installation services.
Why did we invest?
AutoZone (NYSE: AZO) is a compelling investment in 2024. It is the largest retailer of aftermarket automotive parts in the US, in a countercyclical sector which remains stable during economic downturns.
AZO is a leader in consumer aftermarket automotive parts sales. Furthermore, the average age of vehicles are increasing given the recent high interest rates which discouraged new car sales. This leads to stronger demand for replacement parts of vehicles.
There is a huge growth opportunity in AZO’s commercial business segment in which AZO acts as the supplier to repair garages, dealers, service stations, and fleet owners. AZO currently has less than 5% of market share in the US and plans to achieve share gains in this highly fragmented market.
Despite risks from the rise of electric vehicles that has simpler car components compared to internal combustion (ICE) vehicles, AZO remains a compelling business with its strong presence in emerging markets such as Mexico and Brazil.
Look out for Louis's soon-to-be published memo for more details!
EPAM Systems (NYSE: EPAM)
EPAM is a digital pure-play IT Services provider. EPAM provides its clients with digital transformation services through its digital platform engineering and more custom software development offerings. In simple terms, companies often hope to have software like SAP and Salesforce but, to do so, they need a firm to help them customize the software to their business lines. That’s the role of companies like EPAM who exist to address this market gap. There is much more to IT consulting, but that’s the key role of EPAM.
Why did we invest?
We are at a cyclical low in IT spending, and we believe there could be a growth inflection within the next few quarters which will be beneficial to EPAM revenue growth, leading to multiple expansions.
EPAM is a solid company with a strong track record. It has been growing double-digit growth since 2011 and only the last 2 quarters declined. Its growth halt is not a temporary blip due to several reasons like the relocation of staff from Ukraine, and Belarus to other countries.
It is also well-positioned to capture AI trend demand from companies looking to upgrade their enterprises and need custom software for their firms.
Intuitive Surgical (NASDAQ:ISRG)
Intuitive Surgical, Inc. (ISRG) is a global technology leader in minimally invasive care and the pioneer of robotic-assisted surgery. The company's flagship product, the da Vinci Surgical System, revolutionizes surgery by enhancing precision, flexibility, and control, thus enabling complex procedures to be performed through a few small incisions. Intuitive Surgical's products combine advanced robotics, software, and 3D imaging to extend the capabilities of surgeons. The company focuses on continually innovating to improve patient outcomes, reduce recovery times, and enhance the overall surgical experience. As of June 2023, the company has placed over 8,285 systems worldwide of which 4,943 are in the United States and 3,342 worldwide ex-U.S., making it the robotic surgery company with the highest penetration not just in the U.S. but also globally.
Read more about why we believe this stock is a winner here.
Nintendo (TYO: 7974)
Nintendo (TSE: 7974) develops, manufactures, and sells entertainment products globally. It offers video game platforms, playing cards, handheld and home console hardware systems, and related software. The company was formerly known as Nintendo Playing Card Co., Ltd. and changed its name to Nintendo Co., Ltd. in 1963. Nintendo Co., Ltd. was founded in 1889 and is headquartered in Kyoto, Japan. In FY23, overseas sales accounted for >70% of total sales.
Read more about why we believe this stock is a winner here.
Exit of Old Positions
Some of our positions have also hit their target price, which led to our decision to exit. One such example is Adobe Inc (NASDAQ: ADBE), which has been part of our portfolio for a while. We're happy to have seen our thesis play out and for the opportunity to close some of our positions profitably!
We've also exited some positions at a loss unfortunately. One such example is Alibaba (NYSE: BABA), which we probably held onto longer than we should. After our thesis regarding the spin-off failed to play out, we continued to hold and even averaged down on the position, resulting in us catching the proverbial falling knife. Thankfully, there was a slight uptick to Alibaba's share price which gave us the opportunity to exit at a modest loss.
Parting Words
Overall, it has been an exciting quarter, and we're excited for what's to come. Our members have also started working on their 2024H1 memos and more of our 2023H2 memos will be published soon, so stay tuned to our substack!
Best regards,
Gaius Ang
on behalf of EIP