Worm Capital LLC, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A portfolio quarterly return of -0.41% was recorded by the fund for the third quarter of 2021, while its benchmark, the S&P 500 TR Index, by comparison, returned -4.65% over the same period. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q3 2021 investor letter of Worm Capital, the management firm 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 $44.9 billion market capitalization. SPOT delivered a -25.35% return since the beginning of the year, while its 12-month returns are down by -5.96%. The stock closed at $234.90 per share on October 7, 2021.
Here is what Worm Capital has to say about Spotify Technology S.A. in its Q3 2021 investor letter:
“The beauty of continuously accumulating marginal gains is that it has a profound compounding effect over time: If your goal as an individual, organization, investor—whatever you are—is trained on the belief that you should always be improving, there is the potential for exponential growth.
Spotify is a wonderful example of this dynamic as well.
Although the market has pummeled this position in recent months, falling more than 35% from all-time highs—and has contributed significantly to our negative year-to-date performance—the company is meeting and often exceeding our internal expectations. Spotify is expanding territory, reducing frictions for creators, enabling the next-generation of audio advertising (a high margin opportunity), and continuously experimenting to improve the experience for both creators and fans to create an essential platform.
Spotify is, in many ways, building the essential audio infrastructure for the Internet, much like Google built the search infrastructure to power Web 2.0 or Apple built the hardware infrastructure power the app economy. We think the valuation represents one of the wider deviations between price and value in the market today, but we think time will be on our side here—like all our positions, we maintain a long-term view on the company and certain theses
may take multiple years to play out.In our view, Daniel Ek’s vision for Spotify is far grander than most may realize, and we encourage you to listen to his recent podcast with Patrick O’Shaughnessy. “The value of what you are building is the sum of all the problems that you solve,” Daniel says. “I still think we’re early days with Spotify. There’s so many problems left to be solved.” (We agree.)
Two charts below that help contextualize both Spotify’s lead (largely as a result of aggregating marginal gains, and passing those gains to consumers) as well as a chart that represents just how early we are in the streaming audio era.
Like most great growth business stories, the market tends to vastly underestimate the total addressable market in its early days. We believe Spotify will ultimately prove out to be the Google of audio, and it should command a far higher multiple today. For those interested, Eric spoke in detail about our investment thesis on Spotify with John Rotonti in September – link here. Again, in terms of fund performance, we understand this year has been frustrating. And we want to again thank you for your trust and patience.”
Photo by Alexander Shatov on Unsplash
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 -8.30% 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.
