Rowan Street Capital LLC, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be seen here. A return of -13% net of fees, was recorded by the firm for the third quarter of 2021, causing the fund to decline -9.2% (net) year-to-date as of September 30. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Rowan Street Capital, in its Q3 2021 investor letter, mentioned Spotify Technology S.A. (NYSE: SPOT) and discussed its stance on the firm. Spotify Technology S.A. is a Stockholm, Sweden-based music streaming services company with a $45 billion market capitalization. SPOT delivered a -25.22% return since the beginning of the year, while its 12-month returns are down by -11.86%. The stock closed at $235.30 per share on October 12, 2021.
Here is what Rowan Street Capital has to say about Spotify Technology S.A. in its Q3 2021 investor letter:
“Let’s look at one of our investments, Spotify, as an example. We encourage you to review our investment thesis on Spotify that we published in our Q2 2020 Letter and in H1 2021 Letter. The company went public in April of 2018 and since the stock has delivered the following calendar year returns:
2018: -24% (since IPO date)
2021: -26% (as of this writing)
As you can see, performance of an individual stock can be very lumpy from year to year. Spotify was the biggest contributor to our funds’ performance in 2020 and it’s the second biggest detractor thus far in 2021. Do these short-term stock price gyrations matter to us? Absolutely not! Focusing on this and judging our investment based on how it performs in any given year would be akin to attempting to win a football game while keeping our eyes on the scoreboard. This is why at Rowan Street, our eyes will always be focused on the “playing field”. If we continue to do that, the score will take care of itself over time!
What does it look like on the “playing field” for Spotify?
As you can see from the tables below, Spotify’s intrinsic value has increased quite a bit since its IPO date. Revenues have increased by 75% (or ~20% p.a.), gross profits have increased 64% (~18% p.a.). We believe that management has done a terrific job thus far in reinvesting these gross profits into building the world’s leading audio platform and constantly innovating ( and out-innovating its competitors) to deliver for both artists and fans. The result of their investments could be seen in the growth of Monthly Active Users (MAU) as well as their Premium Subscribers. The former has grown at 2.3x and the latter at 2.1x over the past 3 years, and we estimate that it’s feasible for Spotify to grow to ~1 billion users over the next 5 years. If the management continues executing the way they have been in the past, we have a pretty good chance of attaining our double-digit return from owning Spotify’s stock over the next 5 years.”
Based on our calculations, Spotify Technology S.A. (NYSE: SPOT) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. SPOT was in 48 hedge fund portfolios at the end of the first half of 2021, compared to 46 funds in the previous quarter. Spotify Technology S.A. (NYSE: SPOT) delivered a -10.82% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.