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Monthly Report International Fund October 2021

31/10/2021

International Fund October Monthly Report

Abrupt changes to the social media landscape came into focus over the month of October, with some businesses more impacted than others. By month’s end, the Forager International Shares Fund unit price was down 1.79% against an index return of 0.85%.

The challenges for social media stocks began with one we don’t own. Snap (NYSE:SNAP) reported its quarterly earnings on 21 October, and was down 27% the next day. Snap owns Snapchat, a messaging and photo-sharing app which generates revenue by serving advertisements to its users. The share price reaction was due largely to a lower revenue forecast for the next quarter. Snap’s CEO pointed to privacy changes implemented by Apple (NASDAQ:AAPL) as a reason for the shift in expectations. 

These changes require Apple users to explicitly opt-in to allow applications to track their activity across other apps and mobile websites. Historically, opting in was the default option – meaning, advertisers have been tracking most of us for years. The data captured was invaluable, allowing businesses to serve us targeted advertisements based on our interests and accurately measure the success of advertising campaigns. Without it, both of these things get much more difficult. 

Markets have been aware of Apple’s privacy changes for some time now, but the extent of the impact was unknown. Snap’s share price has continued to fall since its announcement, and the share prices of other social media businesses like Facebook (NASDAQ:FB), Pinterest (NYSE:PINS) and Twitter (NYSE:TWTR) have followed suit to varying degrees. The latter two are held by the Fund.

Pleasingly, Twitter’s third-quarter results and ongoing outlook showed no obvious impact from the privacy changes. Historically, Twitter has been so poor at serving up targeted advertisements that it’s starting from a low base. Most of its revenue comes from broader brand advertising rather than the targeted performance marketing impacted by Apple’s changes. Bigger picture: we think Twitter’s purpose, which revolves around users’ interests, professions and hobbies more than their social circle, puts it in a better position to deal with changes than Snapchat, for example.

The company announced its results, held its conference call, brokers put out early notes saying everything was on track, and the stock traded up in the post-market – a sign investors were pleased. But the next day, the stock fell 10% and has barely budged since. Scepticism abounds, and we sympathise. Twitter has not yet lived up to its potential. But we think new product development and progress on revenue and user numbers point to a company improving at a rapid clip. Should it keep executing well, investors will eventually come around.

Pinterest announced its third-quarter results after month-end. Revenue increased 43% to US$633m, with growth coming from significant improvements in average revenue per user. Monthly active users barely grew from the same period last year. This has been a concern as the world opens up and people spend less time on Pinterest  activities. Costs were kept well under control, and grew at a slower pace than revenue. 

Management also confirmed that Pinterest was not materially impacted by Apple’s privacy changes. We thought it might be somewhat insulated, but this was a pleasant surprise. Due to the nature of the platform, Pinterest has a rich set of first-party data that it can use to serve users with targeted ads. While it’s still early days, the company has been preparing for these changes for some time now, investing in technology to improve conversion visibility with a focus on user privacy. 

While these privacy changes were negative for most industry participants, there were a few beneficiaries. A newer investment in the portfolio, Zeta International (NASDAQ:ZETA), is in the sweet spot. This company is an enterprise marketing platform with a large amount of proprietary information that users have consented to sharing (through the use of various free internet tools owned by Zeta). This allows the company to help customers target audiences, and achieve higher returns on its advertising and marketing spend. Zeta is growing its revenues well over 20% per year and trades at an attractive valuation. Tremor International (NASDAQ:TRMR) should also be insulated from these changes, as its exposure to the rapidly growing Connected Television market allows it to deliver targeted advertisements to the right kind of audience.

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