Winston, lose some: Inside the enigmatic riddle of Naspers


Winston, lose some: Inside the enigmatic riddle of Naspers

As Churchill would say, success is going from failure to failure without losing enthusiasm

Tim Cohen

In a radio broadcast in 1939, UK prime minister Winston Churchill said “I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest.”
For some reason, the quote always reminds me a bit of SA’s largest locally domiciled company on the JSE, Naspers. How do you make sense of the company? It’s just mind-boggling.
The company’s businesses are diverse in nature; they are geographically spread over the globe; some are wholly owned, some are investment stakes; some are fantastically profitable, some are deep in the red.
They are further complicated by the fact that Naspers, as is all too well known, has one fantastic investment in the Hong Kong-based company Tencent. It’s complicated because, as market watchers know very well, it is a kind of investment riddle. Its 31% stake in Tencent is worth, at the moment, 25% more than what Naspers is worth.
That means one of two things. Naspers investors think Tencent is 25% overvalued, or they think everything else Naspers owns outside of the Tencent stake is worth less than nothing. How can that possibly be?
But perhaps there is a key, and the key is its own enigma, something called the “J-curve”, an idea much beloved on investors in tech companies. The idea is that in certain industries, tech companies can disrupt traditional relationships so dramatically that they creep up on the industry, and then suddenly, they burst into massive profitability. The profit line first moves downwards, then flattens as it grows its market share, then gradually upwards as it gets traction. Then at a singular moment, the company emerges into the sunlight, full of implicit “I told you so’s” and investors cover themselves in Bugattis.
You can see the enigmatic, circular beauty of the notion for tech investors and practitioners alike. By this logic any company actually making money is just on the road to perdition because then you are not the disruptor, you are the disruptee. Losing money is a positive bonus in this topsy-turvy world. And yet, the pattern has repeated itself so often now, it has some real validity: think of Google, Facebook and all the rest. The trick is to know which companies have magical J-curve potential and which do not.
To qualify, the absolute prerequisites are the following: markets where a digital solution can transform the nature of the business; markets where there is real scalable potential; and markets where first-movers can lock up the customer. It’s very Game of Thrones; there can be only one winner.
Hence, the inside of these businesses can be brutal. Tencent CEO Pony Ma famously set up two teams who, unknown to each other, were given the same brief – to come up with WeChat, now one of the pillars of the company.
The real delectable skill of Naspers chairman and former CEO Koos Bekker has been to find these J-curve available businesses. Yet he had to do so in the context of two huge problems: no money and competition from much bigger players. Of course Naspers had money, but nothing remotely like the great wads of cash available to the big Americans, who also got bigger and faster, as is the wont of the US of A.
The result is that Naspers is all over the place, in Russia, Brazil, eastern Europe. And China. Anywhere where he could avoid going head-to-head with the crunching weight of Lincoln Continentals roaming the globe. The solution to the money problem was to keep hold of the solid pay-TV business on the back of which the hundreds of bets on little start-ups were taken.
But now, everything has changed. Tencent’s profits make MultiChoice’s contribution look puny and unnecessary, so it is being listed separately, which is a polite way of saying jettisoned.
But the crucial question is one of cash-burn, as it so often is with tech companies. Naspers recently sold a slice of its key investment Tencent to raise cash for the last hurdle: getting the host of little ships into the upward part of the J-curve.
And these ships are really not that little. Naspers classifies them as falling into these categories: classifieds, e-tail, travel, payments and food delivery. They are all, in typical Naspers fashion, mixed bags. Take food delivery for example. Two of its minority-held investments, iFood and Delivery Hero, are overwhelmingly dominant in their geographic regions, eastern Europe and South America. iFood has around 98% of the South American market. Swiggy has half the Indian market: this is a lot of food, about 14 million orders a month. Delivery Hero now operates in 42 countries and has a revenue of €544m.
But collectively they still lose money, about $673m in 2018, 10% less than last year. Thank heavens. What a relief. Yet, worryingly, some are hinting at profitability in the near future. The classifieds business has halved its losses, for example. What is the “classifieds business”? It is like Property24 in SA, listings and postings and so on. In fact, the legacy classifieds business, if you can call it that, turned profitable last year. But the company spent heavily on their US mobile classifieds app letgo, a rare battle in the heart in of the big enchilada.
As I see it, Naspers has two problems. Although it is huge in SA terms, the tech environment in which it is plying its trade consists of the biggest companies on the planet. Naspers is now worth $81bn. That seems adequate, but it is a sixth the size of Facebook and a fifth the size of Tencent.
And although the bets Naspers has placed on everything from food delivery to payments are gaining traction, their growth is comparatively sluggish. Alibaba grew revenue by 59% last year, Tencent and Facebook by 46%. Naspers as a whole grew revenue by 9%, but more pertinently, the e-commerce part of the group grew by 25%. This is impressive but by no means at the top of the scale.
Still, it’s up there and fighting, and the story is not yet complete. As Churchill would say, success is going from failure to failure without losing enthusiasm.

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