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Nov 22, 2022

Opportunity Equity Update for Week Ended 11/18/22

William Keenan

Alibaba Gains on Earnings and Updated Zero-COVID Policy While Silvergate Continues to Fall Following FTX Bankruptcy

Last week, the Opportunity Equity Strategy's representative account fell -6.09%, underperforming the S&P 500’s -0.61% decline. (Exhibit 1). The strategy ended the week down -30.20% YTD, 1,460 basis points behind the S&P 500.

Exhibit 1: Performance of Opportunity Equity Representative Account Net of Fees, Versus S&P 500, Through 11/18/221
Time Period Opportunity Equity Representative Account S&P 500
Last Week (11/11 - 11/18) -6.09% -0.61%
MTD 0.62% 2.56%
QTD 11.16% 10.86%
YTD -30.20% -15.60%
1 Year -37.58% -14.36%
5 Year 3.93% 10.93%
10 Year 12.24% 13.48%
Inception (annualized since 6/26/00) 6.19% 6.60%

Source: Bloomberg, Miller Value Partners. Visit the Strategy page for Opportunity Equity performance through the most current month end period.

Alibaba Group Holding Ltd. (BABA) rose above the 50-day moving average after General Secretary Xi Jinping and President Joe Biden’s meeting at the Group of 20 summit boosted the outlook for trade. At the same time, China’s supportive measures to its ailing property sector and the loosening of some COVID restrictions brightened the broader outlook for the Chinese Internet Sector. Later in the week, the company reported FY2Q results that missed consensus on the topline but beat on profitability. Total revenue of ¥207.2B (+3% y/y) was below consensus expectations of ¥208.9B, with adjusted EBITDA of ¥43.3B ahead of consensus of ¥38.4B leading to EPS of ¥12.92 topping expectations of ¥11.21. Cloud revenue grew +3.7% y/y to ¥19.5B versus consensus of +5.5% y/y with management blaming the shortfall on the slowdown on Chinse internet sector clients switching away from Alibaba’s cloud in their overseas operations. Alibaba’s management team delivered a significant beat on cost savings, with expense efficiency a key focus for the business during the quarter. The company’s Board of Directors also approved an additional $15B to its share repurchase plan in addition to the $7B remaining on its current authorization (combined ~10.3% of shares outstanding). Benchmark lowered its price target to $180 from $206 (124% upside), while Truist lowered its price target to $120 from $125 (49% upside).

PureTech Health PLC (PRTC LN) rose above the 50-day moving average. CEO Daphne Zohar presented at the Jefferies London Healthcare conference, where she outlined the company’s strong R&D pipeline and track record of clinical success.

Alphabet Inc. (GOOGL) shareholder TCI wrote a letter to CEO Sundar Pichai advocating for a lower head count and expense base, in addition to a publicly disclosed EBIT margin target, reduced losses in “Other Bets,” and increased share buybacks. The company also announced it would pay $392M to 40 states to settle a lawsuit alleging that the company had misled users into believing location tracking had been switched off on their devices. Morgan Stanley cut its price target to $120 from $125 (23% upside).

Alaunos Therapeutics Inc. (TCRT) rose after the company reported 3Q results. Management reiterated their expectations for the company’s cash balances to last through 2Q 2023 and expects to dose its third patient with its TCR-T cells in its Library Phase I/II trial in 4Q 2022. In addition, the company has doubled its manufacturing capacity from 1 to 2 products per month and lowered its manufacturing time to 26 days from 30 days.

Exhibit 2: Significant2 Contributors to Opportunity Equity Representative Account Performance, 11/11/22 - 11/18/22
Name Type Return
Alibaba Group Holding Ltd. Equity 13.7%
PureTech Health PLC Equity 2.2%
Alphabet Inc. Equity 1.1%
TCRT Restricted Warrant 2019 Derivative 16.7%
Cash Equity 0.0%

Source: Miller Value Partners. See below for additional information.

Farfetch Limited (FTCH) fell below the 50 and 100-day moving averages as the company reported 3Q results that fell short of consensus expectations due to headwinds in foreign currency exposure. The company reported Total GMV of $967M vs $1.03B expected (down 5% y/y, though up 4% y/y on a constant currency basis). Revenue of $593M came in behind consensus at $602M (up 2% y/y and up 14% y/y on a constant currency basis), with gross margins beating by 60bps coming in at 44.9% vs 44.3%, driven by strong expansion in Digital Third-Party gross margins up 700 bps y/y – benefitting from take rate increases reaching their highest level at 32.6%. On profitability, EBITDA missed at -$4.1M vs $10.1M expected. The company reduced full year guidance as they pulled back on marketing spend because of the heightened promotion environment due to excess inventories among luxury brands, and now expects full year platform GMV to decline 5-7% y/y, brand GMV to be flat y/y, and full year EBITDA margins between -3% and -5%. Morgan Stanley lowered its price target to $24 from $26 (196% upside), while BTIG lowered its price target to $13 from $16 (60% upside).

Silvergate Capital Corporation (SI) continued to fall along with the broader digital asset sector after the Wall Street Journal reported that BlockFi, Inc. was preparing for a potential bankruptcy filing and Genesis Global Capital suspended customer redemptions in the wake of FTX filing for bankruptcy the week before last. Silvergate disclosed FTX, BlockFi, and Genesis were digital asset deposit only customers with no credit exposure. The company also provided a mid-quarter financial update, with average QTD digital asset customer deposits of approximately $9.8 billion, excluding all deposits from FTX, compared to $13.2B in 3Q 2022. The bank’s Silvergate Exchange Network “SEN” continues to operate 24/7 with average daily volume totaling $1.9 billion QTD, compared to average daily volume of $1.2 billion in 3Q 2022. All bitcoin-collateralized loans have performed as expected with zero losses and no forced liquidations. Morgan Stanley lowered its price target to $37 from $77 (49% upside), while over the course of the week Goldman Sachs lowered its price target to $35 from $64 (41% upside).

OneMain Holdings, Inc. (OMF) fell below the 200-day moving average after reporting October trust data that showed a sequential increase in both net charge-offs and delinquencies after falling in September. Net charge-offs rose +69bps M/M to 3.89, while delinquencies of 1.99% rose 7bps sequentially, primarily reflecting a +15bps increase in early-stage delinquencies and a +8bps increase in late-stage delinquencies. The data implies a FY22 NCO rate of ~6%, in-line with management’s guidance of at the low-end of the prior 6.1%-6.5% range.

Teva Pharmaceutical Industries Limited (TEVA) fell below 100-day moving average. The company announced a partnership with Rimidi, a digital patient management software platform to allow greater access to its “Digihaler” data. The Digihaler is a digitally-enabled inhaler that allows patients to record inhalation and respiratory activity in real time.  JP Morgan cut its price target to $10 from $11 (15% upside), lowering its rating to underweight from neutral.

Ovintiv Inc. (OVV) followed crude oil prices lower over the course of the week.

Exhibit 3: Significant2 Detractors from Opportunity Equity Representative Account Performance, 11/11/22 - 11/18/22
Name Type Return
Farfetch Limited Equity -21.0%
Silvergate Capital Corporation Equity -27.6%
OneMain Holdings, Inc. Equity -12.5%
Teva Pharmaceutical Industries Limited Equity -8.0%
Ovintiv Inc. Equity -5.4%

Source: Miller Value Partners. See below for additional information.

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As of prior week's market close unless otherwise stated.

1The performance figures for the representative Opportunity Equity account reflect the deduction investment management fees and certain other expenses. Returns greater than 1 year are annualized.

For additional information about Opportunity Equity Strategy performance, please click on the Opportunity Equity Strategy Composite Performance Disclosure. Past performance is no guarantee of future results.

2Significant Contributors and Detractors are based on holdings that had the greatest effect on representative account performance for the week. Holdings that have been in the portfolio since the end of the most recent calendar quarter are identified by name. Returns listed above represent the market performance of the individual security during the week, or for the partial period held in the portfolio during the week.  For information on how Contributor/Detractor data were calculated and a list showing the contribution to the Strategy’s weekly performance of each investment held at such quarter end, contact us.

Any views expressed are subject to change at any time, and Miller Value Partners disclaims any responsibility to update such views. There is no guarantee that market trends discussed herein will continue. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. Past performance is no guarantee of future results, and there is no guarantee dividends will be paid or continued. References to specific securities are for illustrative purposes only. Portfolio composition is shown as of a point in time and is subject to change without notice. Content may not be reprinted, republished or used in any manner without written consent from Miller Value Partners. 

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