VCS Agency - Lunar Capital

Nvidia: Cost to Compute

When people think of AI, they often think of OpenAI, the developer of the large language model (LLM) ChatGPT; and Nvidia, the company that designs the semiconductors used to train these LLMs. US Cloud computing giants like Amazon, Microsoft, and Alphabet are racing to enhance their LLM capabilities, and Nvidia currently offers the best chips on the market to support these efforts.

Over the last two years, the demand for Nvidia’s chips has skyrocketed. This surge in demand has driven Nvidia’s revenue from $5.9 billion in Q4 2023 to $39.3 billion in Q4 2025, a more than 5x increase. Nvidia’s operating income has also seen a dramatic rise, increasing from $1.4 billion in Q4 2023 to $24.0 billion in Q4 2025, a more than 16x increase. Nvidia’s stock price has increased nearly 450% over the past two years. The graph below illustrates Nvidia’s quarterly revenue and operating income over the last three years.

US tech companies have indicated they plan to spend $300 billion on capital expenditure to further build up their data centres for AI. While a significant portion of this spending is on Nvidia’s chips, companies like Amazon and Alphabet are also developing their own chips for more specific uses with a lower cost to compute. Whereas Nvidia’s chips are more versatile and capable of handling a variety of tasks and workloads.

Despite the long-term potential for widespread AI, investors are concerned about the substantial spending by big tech companies on these chips. Cloud service providers accounted for approximately 50% of Nvidia’s data centre revenue last year. There is a fear that these service providers may reduce their spending on the expensive Nvidia chips considering the efficiencies demonstrated by the Chinese developed DeepSeek model. Nvidia’s margins may also come under pressure as these models are effective under cheaper and older chips. These concerns were reflected in Nvidia’s share price, which dropped over 8% on Thursday despite the company reporting another record quarter last week.

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The Lunar BCI Worldwide Flexible Fund Fact Sheet can be read here.
This stocktake is prepared for the clients of Lunar Capital (Pty) Ltd. This stocktake does not constitute financial advice and is generated for information purposes only.

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Alibaba: More for Less

Weekly Stocktake / By VCS Agency

Founded by Jack Ma in 1999, Alibaba was created to enable small businesses to connect with manufacturers and compete with larger enterprises on a global scale. Today, Alibaba operates a diverse range of businesses, including its business-to-business marketplace, retail marketplace, and cloud division. The company also has investments in health and media sectors.

Last week, Alibaba released its Q4 2024 results. The company reported revenue of RMB 280 billion (1 USD = RMB 7.25) for the quarter, marking an 8% year-over-year increase. Income from operations reached RMB 41 billion, up 83% year-over-year, primarily due to a decrease in impairment of intangible assets. Alibaba’s retail division remains the largest revenue generator, contributing RMB 100 billion for the quarter.

Despite the significant revenue from its marketplace, it was Alibaba’s cloud division and its commitment to investing in cloud and AI infrastructure that drove a share price increase of over 15% last week. The cloud-computing division generated RMB 32 billion in revenue last quarter, up 13% year-over-year. Additionally, Alibaba noted that its AI products and services have experienced triple-digit growth for the last six consecutive quarters, although this still represents a small portion of the company’s overall revenue. Alibaba will also benefit from Apple selecting Alibaba to develop its AI offering in the Chinese markets.

In terms of capital expenditure, Alibaba spent RMB 72 billion last year, up from RMB 24 billion the previous year. The company has expressed a strong commitment to expanding its cloud and AI infrastructure, indicating plans to spend more in the next three years than it has in the past decade on capex.

We have recently invested in Alibaba and Naspers, which holds a stake in Tencent, the largest Chinese tech company. Our view is that restrictions on advanced chip sales to China imposed by the US have spurred innovation in China by doing more with less (e.g., Deepseek). These innovations will spur further innovations and reduce the cost of AI processing.

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Adyen: Bring on the Competition

Weekly Stocktake / By VCS Agency

Adyen, the financial technology company that enables businesses to process payments, manage their finances, and analyse their financial data on a single platform, released their H2 2024 results last week. The company reported a net revenue of €1.08 billion, marking a 22% year-over-year increase, and a net income of €516 million, up 24% year-over-year.

Based in the Netherlands, Adyen operates in a highly competitive environment. While many competitors focus on reducing platform costs, Adyen differentiates itself by offering products that reduce friction for customers at checkout, leading to higher conversion rates. This strategic focus allows Adyen to compete on value rather than cost.

Adyen primarily targets larger enterprises, offering a platform capable of processing a high volume of payments, especially during peak times like Black Friday. The company employs a “Land and Expand” strategy to increase its share of customers’ wallets. Initially, customers adopt one of Adyen’s products for a specific location. As they experience the benefits, they gradually integrate more of Adyen’s products across additional locations. This approach not only lowers the cost per payment volume but also consolidates more of the customers’ payment data on a single platform. Notably, 80% of Adyen’s payment growth came from existing customers for H2 2024.

Adyen remains dedicated to regional expansion and targeting new enterprises, despite this process taking longer than introducing additional products and services to existing clients. Currently, the EMEA region accounts for 60% of Adyen’s revenue. Despite potential challenges posed by geopolitical tensions, Adyen’s established presence in multiple jurisdictions positions it well to navigate increased payment legislation and fend off new market entrants.

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In the Amazon-e

Weekly Stocktake / By VCS Agency

In 2000, Amazon, primarily known as an online bookstore, had built one of the world’s biggest websites from the ground up. However, they found that whenever they needed to add new features, their software developers spent most of their time building elements that any software project would require. This made it extremely time-consuming and resource-consuming to scale their site.

To address this, Amazon built a shared layer of website infrastructure that all their teams could use. With the internal success of these layers, Amazon took these services to market, and Amazon Web Services (AWS) was born. AWS has since become Amazon’s most profitable business. In 2024, AWS generated $39.8 billion in operating profit, out of a total operating profit of $68.6 billion for Amazon.

There are several other stories of Amazon identifying financial-, resource-, and time-consuming aspects of their business, then finding and developing solutions, which could then be sold as services to others. Another example is logistics; Amazon uses a combination of third parties like UPS and the American Postal Service (previously) and its own in-house delivery services to deliver to Amazon’s clients. The US Postal Service stopped delivering on behalf of Amazon, and recently, UPS also announced their intention to stop delivering on behalf of Amazon. The rates demanded by Amazon were not profitable for these companies. Amazon found a way to deliver more cheaply, ultimately reducing the costs of delivery to their clients and then selling their logistics services to others who don’t use their marketplace.

In 2025, big tech companies such as Alphabet, Amazon, Meta, Microsoft, and Tesla are planning to collectively spend $300 billion on capital expenditure, primarily on artificial intelligence infrastructure projects. Amazon has indicated that they plan to invest $100 billion in capital expenditure this year. However, not all of this will go towards AI.

Building products in-house can bring a lot of risk, especially if those products don’t sell as well as anticipated. However, when the product meets market needs, it can generate a significant amount of income while reducing costs as that part of the business scales.

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Apple Doesn’t Fall Too Far from the Tree

Weekly Stocktake / By VCS Agency

In 1998, Compaq Research introduced the first “Personal Jukebox.” Although the device was bulky and could only store the equivalent of one CD, it represented a significant advancement in portable music technology. Recognizing its potential, Apple procured exclusive rights to affordable 5GB disc drives developed by Toshiba, which were capable of storing up to 1,000 songs. Apple subsequently redesigned the media player with a sleek and user-friendly interface and launched the iPod in 2001.

Apple is known for observing market trends before developing its own products. The company waits to see which products become popular and, if there is potential for further growth, it creates its own versions with Apple’s distinctive design and sells them to the market.

In the realm of generative AI, Apple has taken a unique approach compared to other major technology companies like Alphabet, Amazon, Meta, and Microsoft. Unlike these firms, Apple has not significantly increased its capital expenditure on building data centres.

Instead, Apple opted for its more patient strategy, aiming to develop an AI of the highest quality. Initially, this method presented some challenges for Apple, such as delays and bugs in the AI features on its devices. Now, in cases where Apple’s AI is unable to generate responses for users, it utilizes ChatGPT to provide the necessary responses.

Apple’s strength lies in its highly valuable consumer distribution platform, designed to create a seamless experience for users centred around the iPhone. In Q4 2024, Apple’s products and services generated a revenue of $124 billion, with an operating income of $42 billion. This robust distribution to a highly valuable customer base is a key strength and could position Apple as one of the significant beneficiaries in the AI race.

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Net Flicks on Flicks on Flicks

Weekly Stocktake / By VCS Agency

Three years ago, Netflix’s stock price experienced a significant decline of more than 70% from its peak reached at the end of 2021. This decrease was driven by the loss of subscribers for the first time in Netflix’s history. Analysts also argued that Netflix was unable to maintain its market leadership and effectively counter the competition. Concurrently, inflation in the United States was rising to levels not seen for decades.

However, last week, Netflix achieved new stock price highs, with the stock closing at $977 on Friday. Netflix ended the week with price-to-earnings ratio of just over 49 and a market capitalization of $417 billion.

Netflix saw an increase in their number of subscribers by nearly 20 million in Q4 2024, reaching just over 300 million subscribers worldwide. Revenue for Netflix rose by 16% to $10.24 billion, while operating profit grew by 52% to $2.3 billion. The significant rise in profitability was attributed to operational leverage. Netflix managed to expand its subscriber base without a proportional increase in operating costs. The below graph shows the change in profitability for Netflix over the last two years.

Why is there so much positivity behind Netflix’s business?

Netflix is uniquely positioned to concentrate their efforts exclusively on streaming, unlike competitors in the entertainment sector who balance their newer streaming initiatives with their currently-profitable legacy assets.

Other competitors, such as YouTube (a subsidiary of Alphabet) and Amazon Prime, have primary businesses in areas such as search and e-commerce that demand extensive company resources in terms of effort and capital. Consequently, these companies may not place a high enough priority on their streaming business, potentially resulting in a loss of market share.

Netflix also has an extensive lineup of new shows and movies scheduled for release this year, as part of its strategy to further expand its revenue base. The company has also introduced advertising packages in numerous markets and plans to scale these efforts throughout the year. Following the success of live events such as the Jake Paul vs. Mike Tyson fight, Netflix is exploring opportunities to develop its live events segment, focusing on occasional events rather than expensive, year-long sports leagues.

However, despite their recent successes, Netflix faces significant competition, increasing costs, and shifting consumer preferences. A few missteps could considerably impact the company’s performance.

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TSMC: Manufacturing Artificial Intelligence

Weekly Stocktake / By VCS Agency

Good day everyone, I trust you all had a pleasant break during the festive period. Taiwan Semiconductor Manufacturing Company (TSMC) commenced the year by announcing their results for Q4 2024.

TSMC is widely regarded as one of the most crucial companies globally. While Nvidia and Apple design semiconductors for AI and phones, respectively; TSMC is the company that manufactures the semiconductors. Today, over 90% of the world’s most advanced chips are produced at TSMC’s manufacturing facilities in Taiwan.

Semiconductor designers choose TSMC for their chip production for several reasons:

Economies of Scale: Given TSMC’s existing scale, they can accelerate chip production much faster than other companies.

Supply Chain Resilience: TSMC has the capability to stockpile critical materials during shortages, ensuring a reliable supply chain.

Business Model: TSMC specializes solely in semiconductor manufacturing, unlike competitors such as Intel and Samsung who also design chips. This specialization instils confidence with their clients that TSMC is not competing with them.

Operational Excellence: TSMC’s operational expertise enables them to produce semiconductors with fewer defects, compared to their competitors. This proficiency allows TSMC to increase their margins while reducing costs for their customers.

TSMC’s revenue for the quarter was $26.9 billion, an increase of 37% compared to the previous year. This growth in revenue was primarily due to strong performance in the High Performance Computing segment and the Smartphone segment. These segments represented 53% and 35% of TSMC’s Q4 2024 revenue, respectively. As a result of the increased production scale for high-performance computing chips, TSMC’s income from operations rose by 63% year over year to $13.2 billion, indicating an operating margin of just under 50%.

Due to increasing geopolitical tensions, the United States has been encouraging TSMC to build facilities in the US by offering grants and loans. TSMC has built a factory in Phoenix, Arizona and has already started producing semiconductors from this facility. Additionally, the US has issued executive orders restricting companies from selling advanced semiconductors and semiconductor equipment to China, as both countries strive for technological leadership. Despite these measures, semiconductor designers continue to choose TSMC due to a lack of viable alternatives.

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Quarterly Investment & Performance Review – 31 December 2024

Quarterly Performance / By VCS Agency

Sabir provides an update of the Funds’ performance and how Lunar Capital plans to invest in the current market climate

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Sweet and Sour Lululemon

Weekly Stocktake / By VCS Agency

The premium athleisure brand Lululemon has gone through a rough patch this year. Last week the company released their third quarter 2024 results, sending the stock just under 16% higher on the day. However, year to date, the stock is down 14%, compared to the S&P 500 index, which is up just under 28%.

The two main issues Lululemon recently faced are:

Earlier this year, Lululemon released a selection of leggings that did not meet customer preferences. The range lacked sufficient colour options and had incorrect size quantities, resulting in missed sales in key locations such as the US.
Another challenge that Lululemon encounters is the highly competitive market in which they operate. If customers are dissatisfied with the products, they can easily switch to other brands. Given the premium pricing of Lululemon items, customers tend to be particularly discerning and may readily choose alternatives.

During the earnings call, Lululemon stated that they will focus more on their existing customers in the US, rather than significantly expanding the total number of stores to gain new customers. Of the total revenue of $2.4 billion in Q3 2024, America accounted for 79% of the revenue. One of the strategies Lululemon is implementing is increasing the percentage of new products to total products in their stores as a way of encouraging current customers to spend more at their stores. The next few quarters will indicate the success of this strategy.

Despite some challenges in the US market, Lululemon’s international segment has shown significant growth. The segment in China grew by 39% to $318 million, while revenue from regions outside the Americas and China increased by 27% to $308 million.

Internally, the company maintains healthy margins. The gross margin for Q3 2024 was 58.5%, an improvement from 57% in the same quarter of the previous year. Furthermore, Lululemon’s operating margin for this quarter was 20.5%, compared to 15.3% in the same period last year.

Lululemon primarily sells through its stores, giving it greater control over its brand. This strategy allows for quicker adjustments. However, challenges remain, and only time will tell if they regain customer favour.

This is the last Stocktake of the year. Have a great festive season and travel safely. The Weekly Stocktake with Danyaal will resume in January.

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CrowdStruck

Weekly Stocktake / By VCS Agency

On July 19th, a faulty update, from cybersecurity firm CrowdStrike, caused a global outage on Windows devices, leading to major IT disruptions worldwide. Businesses and governments faced operational issues, with losses estimated in the billions. CrowdStrike’s share price dropped by over 40% after the incident.

CrowdStrike has addressed the issue and claimed to have implemented more robust internal processes to ensure the proper functioning of their updates and products. The company has also engaged extensively with its customers to reaffirm the quality of its products in terms of protection, ease of use, and cost-effectiveness at scale. Post-outage, CrowdStrike’s customer retention rate was 97%, slightly lower than the 97.5% reported in the same quarter last year. The company attributed this decline primarily to the outage.

Despite the outage, CrowdStrike’s revenue for the third quarter of the 2025 financial year reached $1.01 billion, marking a 29% increase compared to the same quarter in the previous year. Their annual recurring revenue was $4.02 billion, reflecting a 27% increase year over year. CrowdStrike noted that customers are seeking to consolidate service providers. Currently, 66% of customers use 5 or more security modules on CrowdStrike’s security platform, Falcon. The platform allows customers to manage their cybersecurity from a single platform.

With ongoing geopolitical tensions globally and ever-increasing connectivity, cybersecurity has become crucial for governments and organisations. Cybersecurity firms have benefitted from this trend as more organisations seek to protect themselves from online threats. Despite the July outage, CrowdStrike’s stock has risen by over 40% year-to-date. Although still about 11% from its peak.

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