Why PPFAS Mutual Fund continues to hold Alphabet, Microsoft, Amazon and Meta stocks

The Parag Parikh Flexi Cap Fund, which has been the flagship scheme of the fund house, has been investing in US stocks and has about 16% of the portfolio exposure to stocks namely Alphabet, Microsoft, Amazon.com, Meta Platforms (formerly Facebook) and Suzuki Motor.

Corp ADRs (American Depositary Receipts) as of October 2022. According to Rajeev Thakkar, the chief investment officer at the fund house, investing in international stocks is to lower the country-specific volatility and to find opportunities to invest in companies that are otherwise not available in India; and not necessarily to maximize returns.

Talking about the US Stocks in the tech space including streaming, digital ads, e-commerce, cloud computing and artificial intelligence, Thakkar said, “trends in these areas have existed even before Covid but accelerated during the pandemic period and now took a breather.

These trends will continue in the coming decades as well. The companies we own are strong players in some of these segments.” Further, the chief investment officer also acknowledged the fact that the pace of disruption in the technology space is very fast. He took the example of the downfall of Yahoo (a web giant in the past) and My Space (a social media network platform), which were popular many years ago. “We often get questioned if the US tech companies we held are also getting disrupted.

I don’t think the answer is yes,” Thakkar said. He briefed the rationale of investing in the US tech stocks and why he believes it is justified to hold them at the current levels and even at, seemingly, frothy valuations witnessed in 2021.

Note that the fund house currently cannot buy more international stocks by remitting money outside India as the asset management companies (AMCs) investing in overseas securities were advised by the regulator, SEBI, to stop subscriptions to avoid the breach of industry-wide overseas investment limits of $7 billion.

Alphabet

Thakkar said that Alphabet (Google) company probably knows you more than your sibling, parents, spouse or children. He added, “with each passing month and with each passing year, their competitive advantage and moat are becoming stronger.”

Giving an example of how the company tries to stay relevant at all times, Thakkar gave an example of Google Maps, which evolved from being just an application for maps to navigation to, now, advertising.

“In 2021 (when the tech stocks witnessed exuberance in the stock market), it was valued at 28 times earning (price earnings ratio). This is for a company that is monopolistic in nature. It has a big moat and I don’t think the stock was overvalued,” added Thakkar.

Microsoft

Microsoft Corporation that offers products such as Microsoft 365 (Office), Windows, Azure Cloud, Devices (Surface, X Box, HoloLens), LinkedIn, Bing, Dynamics (CRM) and Power BI is another international stock that PPFAS Flexi Cap fund held in its portfolio.

“It runs a dominant operating system. They have a subscription-based office productivity suite with applications such as Excel, Word and PowerPoint, offering software as services and is positioned as number two in providing cloud services. It is growing quite

well,” Thakkar said about the company.At 33.7 price-to-earnings ratio in 2021, Thakkar believes that the company was not in a valuation bubble and the fund continues to hold it in the fund’s portfolio.

Amazon.com

Amaon.com, with business segments such as Cloud Computing (AWS), e-commerce, Fulfillment, Prime membership (Shipping, video, music, food delivery), devices such as Kindle, echo/alexa, ring), advertising, logistics, is another favourite company of the fund house.

“Thecompany tries to convert expenses in the profit & loss statement to a profit centre,” said Thakkar. Explaining this concept, he gave an example of logistics cost, which used to be a significant expense to the company. “Now the company is running logistics in house and also provide its services externally,” he added.

The company has a current market valuation close to $1 trillion. “Going by the current and last year’s price-earnings ratio, it may seem that the valuation has been in a bubble, but in our view, it is not. Arguably, the company’s entire valuation can be justified based on the AWS business segment (cloud platform) alone, which is a significant part of the company’s profits and prospects”.

Meta Platforms Inc

Meta Platforms offers applications such as Instagram + Reels, Facebook, Whatsapp, Messenger, Oculus, Metaverse. Talking about the growth of the company, Thakkar highlighted the revenue of $257 billion generated by the company in 2021. This is against the reported revenue of just $7 billion in 2013.

This company was valued at 23 times the earnings in 2021, but now at nine times on the back of sharp correction witnessed in the share price aggravated by fall in reported profit this year.

“I don’t think the company is overvalued. Whatsapp and Facebook are growing well. While Tik Tok has taken some market share from Instagram, the latter is not dead,” believes Thakkar.

“This is irrespective of company’s spending on Metaverse project. It’s success or failure is largely immaterial at this point in time. Most companies overestimated their profits last year. But all of them are cutting costs now.” he added.

Other geographies

Talking about investing in other geographies other than the US, Thakkar said that they earlier had investments in Anheuser-Busch, a European alcohol beverages company and Nestle, a Swiss-based global FMCG Company, among others. We also currently own, Suzuki Motor Corp, a Japanese company. When it comes to China, after thorough due diligence, we realised we are not comfortable investing in the country for various reasons including the political situation.