Dear Louis, Since mid-June, we’ve seen some nice strength in the stock markets. The tech-driven NASDAQ composite has risen an impressive 19%. It’s great to see this kind of healthy market action after what we all have been through in the first half of the year. But I don’t think we’re out of the woods yet. We haven’t yet seen the pivot that I have been expecting from the Federal Reserve, and that means that there will almost certainly be some more volatility in the weeks ahead. For that reason, I’m going to recommend that we sell share in ON Semiconductors (ON). Our investment thesis has worked perfectly. We first invested in the stock in December of 2020. As one of the leading suppliers of automotive semiconductors, ON was a perfect way to gain exposure to the electric and autonomous vehicle trend. In my original writeup, I predicted we would see 80% returns in two years. Here we are less than two years later, and ON is up 120% from our entry price, despite the current market volatility. ON is currently trading right around its all-time highs. With inflation roaring, discretionary spending is way down. This is reducing demand for many consumer electronics. And the price of electric vehicles is on the rise again, which is not good for consumer demand either. This is still a great company, but where ON is currently trading, I see more downside risk than I do upside potential. And we are sitting on tax advantageous long-term capital gains. So let’s secure a win with On Semiconductors and realize a 120% return. Even if we weren’t able to secure the entire 120%, I still recommend we sell today. In addition to ON Semi, I’d also like to provide a quick update on another portfolio company, Twilio (TWLO). On August 4, Twilio announced its second quarter results. Revenue was up an impressive 41% to $943.4 million. The company also added about 7,000 new customers and forecasted revenue growth for next quarter that would represent 31% growth year over year. These are impressive metrics from any company, and it is achieving 50%+ gross margins as well. But Wall Street estimates were higher than what Twilio delivered, and the stock fell nearly 20%. Seeing a move like that is gut-wrenching. And our first instinct might be to sell the stock right away. But this isn’t a company to sell. Now, if I felt that something was fundamentally wrong with Twilio’s business, I would recommend we sell the stock immediately. This latest drop is nothing but a temporary overreaction. And so far, investors seem to agree. Twilio had already popped more than 12% higher since Friday the 5th. On a valuation basis alone, Twilio is an incredible investment at these levels. The stock trades at an enterprise value to sales (EV/S) of 3.3 based on 2022 estimated sales. This is the cheapest Twilio has ever traded as a public company. Even during the market crash of March 2020, Twilio only traded for an EV/S of 7.8. And the forward valuation based on 2023 estimated sales is an inconceivable 2.6. This is a company that has traded as high as a 25 EV/Sales in the past, and rarely trades for anything less than 10 times sales. Twilio is one of the most important picks and shovels technologies companies in the industry. Not only is it one of the highest growth companies in high tech, but it also has one of the largest moats in the industry. I hate to see an incredible company down to irrational levels. We’re currently down about 66% on our position. That hurts. But when I look at Twilio, I see a company that will be trading at multiples higher, well above our entry price, within the next 12 months. And considering that we just entered the position back in December last year, we have a few more months to go before we cross the twelve month mark for long term capital gains. I recommend that we take advantage of that time, as I believe that the stock will sharply recover as we enter 2023 and we’ll have a good window for a very profitable exit. For those subscribers with a time horizon into the first half of 2023, I recommend that we hold onto shares and allow the valuation to recover as Twilio continues to execute and grow. And for those looking to deploy additional capital and take advantage of irrational valuations, I feel very comfortable recommending a double down on this position. The current valuation will not last, and Twilio is a very obvious acquisition target right now. Action to take: Sell shares of On Semiconductors (ON) for a120% gain. Hold on to or double down in our position in Twilio (TWLO). | Regards, Jeff Brown
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