VCS Agency - Lunar Capital

Netflix: The Saga Continues

By the end of 2024, Netflix had over 300 million subscribers in 190 countries. Netflix estimates that this translates to an audience of roughly 700 million people. Last week, Netflix released their Q1 2025 results, reporting revenue of $10.5 billion, up 12.5%. Operating income was $3.3 billion, representing an operating margin of 31.7%, up from 28.1% in the same quarter last year. Netflix has set a goal of doubling its current revenue by 2030.

Over the last few years, Netflix has steadily increased the prices for their services. In the US, the price of the standard plan rose from $13.99 in 2019 to $17.99 this year, a 28% increase. Netflix has also kept its content spending relatively stable, which has allowed the company to increase profitability substantially. Two years ago, Netflix cracked down on password sharing. According to Netflix, this had a net positive impact, as more people created their own accounts compared to those who left the platform entirely.

A core pillar of Netflix’s strategy is to fund and create original content. This approach gives them full creative control and rights, enabling them to produce more content centred around their intellectual property without incurring substantial leasing costs. Netflix has had significant success with this strategy, creating shows like Stranger Things and Squid Games, which have become culturally significant shows with large fanbases. Netflix has also refused to lease its content to other platforms. This strategy has helped Netflix draw in and retain customers despite the intense competition.

However, Netflix still faces stiff competition from other streaming platforms, linear TV, and the entertainment industry as a whole. The risk is that Netflix might lose its ability to engage subscribers, leading to non-renewals. However, as it stands, the company is in a strong position. The market values Netflix highly, with a price-to-earnings ratio of over 45.

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Disclosures
Lunar Capital (Pty) Ltd is a registered Financial Services Provider. FSP (46567)
Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
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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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Lunar Capital Quarterly Investment & Performance Review – 31 March 2025

Quarterly Performance / By VCS Agency

Sabir provides an update of the Funds’ Performance and Strategy of Lunar Capital as of end March 2025.

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JP Morgan – Banking on Volatility

Weekly Stocktake / By VCS Agency

JP Morgan Chase & Co. reported their financial results for the first quarter of 2025. The company posted a revenue of $45.3 billion, marking an 8% increase year over year. Net income for the quarter reached $14.6 billion, up 9% from the same period last year. JP Morgan’s return on equity was 18% for the latest quarter. The company also reported an overhead ratio of 52% for the quarter. Despite the market volatility, JP Morgan’s share price has decreased by just under 2% since the beginning of the year.

The significant growth in revenue was primarily driven by the company’s Markets & Securities Services division, which saw a 19% increase to $10.9 billion. Notably, revenue from equity markets increased by 48% to $3.8 billion, the highest ever recorded by the company. This stand-out performance was attributed to increased market activity and trading volumes, which boosted revenue.

JP Morgan also capitalized on the increased market volatility through its derivatives business. Derivatives are financial contracts whose value is derived from the price of an underlying asset, such as stocks, bonds, or commodities. As volatility increases, the prices of the actual derivative contracts increase, and vice versa.

In his prepared remarks, CEO Jamie Dimon highlighted the dual nature of the current economic landscape. On the positive side, potential tax reforms and deregulation could provide significant benefits. However, challenges such as tariffs, trade wars, persistent inflation, high fiscal deficits, and asset price volatility remain considerable risks.

JP Morgan’s strong balance sheet continues to be a cornerstone of its stability. The company achieved a Common Equity Tier 1 (CET1) Capital ratio of 15.4%. The CET1 ratio is a measurement of a banks available capital expressed as a percentage of a bank’s risk weighted assets. The higher the CET1 ratio, the higher the loss absorbing capabilities. JP Morgan has a total loss-absorbing capacity of $558 billion.

As the global economy navigates through uncertain times, JP Morgan’s “fortress balance sheet” gives the company the potential to manage future volatility and capitalize on emerging opportunities.

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Not Tariffic

Weekly Stocktake / By VCS Agency

Last week, the US Government released a list of tariffs and levies to be applied to all countries. These tariffs will range from 10% to 50% on 185 countries, significantly higher than what analysts and commentators had anticipated. The effective tariff rate, which is the customs duty revenue as a proportion of goods imported, is expected to range from 20% to 25% for 2025. The last time the effective tariff rate for the US was this high was nearly 100 years ago.

What is the USA, through the Trump presidency, trying to achieve?

Trade Balance
In 2024, the US had a trade balance (Exports – Imports) of -$1.2 trillion. US consumers have benefited from better and cheaper products from other nations, while US companies have externalized a large portion of their manufacturing to countries with a lower cost base. Big Tech companies such as Apple and Nvidia design their products in the US but outsource many components to companies like TSMC in Taiwan, which manufactures highly sophisticated semiconductors.

The intention with tariffs is to make the cost of goods imported to the US higher, which will then make manufacturing these same goods in the USA more viable. Ultimately, someone must pay the additional costs of the tariffs, and these will be consumers in the USA unless the companies selling these products absorb some these costs. Establishing complex manufacturing capabilities is not a trivial matter and could take years to do.

US Dollar as Reserve Currency
The US dollar is the world’s reserve currency. This creates a natural demand for US Dollars thus keeping its price elevated. This is a major contributor to the trade deficit in the USA, making it cheaper to import than to manufacture in the USA.

The reserve currency status of the US dollar has provided the USA with significant power over the international financial system, for example by limiting access to the international financial markets with sanctions or even through confiscating the funds of countries that it deems are enemies.

US National Debt
The US national debt reached just over $34 trillion last year, rising from $395 billion in 1924. Since the 1980s, the debt as a percentage of GDP has increased from just under 40% to over 120% in 2024. As the debt-to-GDP ratio gets higher, it becomes more challenging to pay off the debt, because the interest bill continues to take up a larger portion of the national budget.

As one would expect, the creditors of the USA, i.e. the institutions funding the USA by buying their bonds, have started expressing deeper concerns about the sustainability of this huge growth in debt.

How could you respond to this?
At Lunar Capital, our view was that the US markets have been over-priced since last year. We have maintained a slightly higher position in cash and have increased our exposure to businesses outside of the US, such as Alibaba, Naspers, MELI and Anglogold.

There are still high levels of uncertainty in the markets, which are been reflected in the drop in share prices and the markets around the world. At some stage, some great companies will present good buying opportunities.

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De-Lululemon

Weekly Stocktake / By VCS Agency

Lululemon, the Canadian athleisure brand, released their Q4 2024 results last week, reporting a revenue of $3.6 billion, up 13% year over year, and an operating income of $1 billion, up 14% year over year. For the full year, net revenue in the Americas increased by 4%, while net revenues from their international segment surged by 34%. The international segment accounted for 25% of Lululemon’s total sales for the year, while the US accounted for 61%.

Despite these strong results, management indicated signs of a more frugal consumer. Over the past three years, consumers have faced high inflation, and recently the looming threat of tariffs on the US’s trading partners could potentially decrease Lululemon’s gross margin. Year-to-date, Lululemon’s stock price has decreased just over 23%.

Known for selling $100 yoga pants, Lululemon recorded a relatively high gross margin of 60.4% for the most recent quarter. A high gross margin often allows a company to handle sudden increases in input costs without necessarily having to increase the prices of their products suddenly.

However, Lululemon is in a challenging position. Last year, they released a collection of products that didn’t resonate with US consumers. A company that prices its goods extremely high but fails to deliver on its original appeal to its customers, even the most loyal, could easily lose them to competitors offering similar products at lower prices. It is then extremely difficult to win those customers back.

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Tencent – Gaming and Beyond

Weekly Stocktake / By VCS Agency

Tencent, the Chinese technology and entertainment company, has multiple business ventures in entertainment (primarily gaming), financial technology, and other internet services. One of Tencent’s most popular services is WeChat, an all-in-one app used for messaging, social media, payments, and other applications. Additionally, Tencent has a variety of investments in gaming companies, such as Riot Games, which publishes the popular League of Legends franchise, which has 150 million active accounts.

Last week, Tencent released their Q4 2024 results. Revenue for the quarter was RMB 172.4 billion (1 USD = 7.25 RMB), up 11% year over year. Gross profit for the quarter increased by 17% to RMB 90.6 billion, while operating profit rose to RMB 51.5 billion, up 24% year over year. Tencent’s gaming division grew 14% year over year, accounting for 46% of their revenue in Q4 2024.

Tencent has seen its share price increase by over 20% this year. However, the gaming division hasn’t been the primary driver behind Tencent’s stock price increase. Earlier this year, a Chinese company called DeepSeek released a Large Language Model (LLM) called R1, which appeared to have capabilities similar to those of OpenAI, Google, and Meta’s LLMs. DeepSeek claimed they spent a fraction of the cost to train their AI model compared to their US competitors.

Tencent plans to integrate DeepSeek’s AI-powered search into Weixan, Tencent’s domestic version of WeChat, rather than use their own proprietary LLMs. To support their AI cloud strategy, Tencent is still increasing their capital expenditure to accommodate the necessary networking requirements. In the most recent quarter, they spent RMB 36.5 billion in capital expenditure, 4.8 times more than they did in the same quarter last year.

Tencent’s recent business strategy has focused on making acquisitions to gain market share. However, there is a risk that Tencent may overpay for acquisitions that do not result in a significant increase in revenue and net profit. Time will tell how capable Tencent is at generating revenue with its AI strategy.

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Hala Zara

Weekly Stocktake / By VCS Agency

Consumers in the clothing (fashion) industry are fickle. At times, they show strong loyalty to a brand, only to lose interest shortly thereafter. Their purchasing decisions often follow changing trends and are also influenced by other factors such as quality, price, and product range. This presents a challenge for clothing companies to achieve sustained growth over the long term, as creating products that consistently appeal to customers can be difficult.

Inditex, listed in Spain and the owner of Zara, is one of the few players that have been able to sustain growth over long-term. In 2024, the company generated €38.6 billion in revenue, up 7.5% year over year. Gross profit increased 7.6% to €22.3 billion, and net income increased 9% to €5.9 billion, representing a net margin of just over 15%.

The single-digit sales growth can be attributed to multiple factors. Zara, Inditex’s flagship brand, accounted for 72% of the company’s sales and grew at 6.6%, while the second-largest brand, Bershka, accounted for 7.5% of sales but grew 11.8% year over year. At the end of 2024, Inditex operated over 5,500 stores worldwide, showcasing just how wide their reach already is.

Recently, the company has focused on increasing its logistics capacity. Last year, Inditex spent roughly €900 million on additional capital expenditure to enhance its logistics, with plans to spend a similar amount this year.

The company is also working on increasing profitability by streamlining its business. Inditex is known for its quick turnaround time, from design to store shelves within weeks, compared to other companies that can take months. Inditex doesn’t keep high levels of stock but uses a data-driven approach to track which items are selling faster than others and then automatically ramp-up or scale-down manufacturing accordingly.

Inditex’s success can be attributed to its ability to quickly adapt to changing consumer preferences, efficient logistics, and a data-driven approach to inventory management. However, the company faces several risks, including intense competition from both established brands and emerging online retailers, economic instability that can affect consumer spending, and the need to continuously innovate to stay ahead of fashion trends.

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ShopRite on Track

Weekly Stocktake / By VCS Agency

Shoprite, South Africa’s largest consumer goods retailer by revenue, has continued to expand its market share, outperforming competitors such as Pick ‘n Pay, Woolworths, Spar, and others. For the 26-week period ending December 29, 2024, Shoprite Group increased its merchandise sales by 9.6% to R128.6 billion, higher than its competitor’s growth rate of 3.1%. The gross margin for Shoprite improved by 30 basis points to 23.9%, while profit for the period rose by 11.9% to R3.7 billion, representing a 2.8% profit margin.

Shoprite’s growth strategy revolves around its three core businesses: Checkers, Shoprite, and OK. It also has businesses in 10 countries outside of South Africa. These brands target different market segments based on customer price sensitivity and product range. Shoprite leverages its core businesses to venture into new products and services, ensuring that each new initiative is anchored to one of its established brands. For instance, the delivery service Sixty60, is an add-on service to the Checkers brand, and has recently also been added as a service to the Shoprite brand.

Given the low margins that Shoprite commands, the company exercises caution when entering new markets. Their approach involves opening stores in select locations and expanding based on the traction those ventures get. The success of the Checkers Sixty60 service has prompted plans to extend the delivery service to Shoprite-branded stores. Additionally, the Group has diversified into pet stores, baby stores, clothing stores, and other retail ventures.

Shoprite faces the risk of over-investing in its quest for market share and growth. In a stagnant economy, this could lead to riskier ventures. One such venture that has not met expectations is their furniture business. Recently, Shoprite decided to sell its OK Furniture and House & Home business, which had a merchandise sales growth rate of 6.2%, below Shoprite’s overall growth rate of 9.6%. The trading margin for the furniture business also decreased by 30 basis points to 4.8%.

Shoprite is known for its diligence. The company’s price-to-earnings ratio trades at a premium of 30%-40% compared to Woolworths and Spar. Any operational missteps could result in significant adjustments to its stock price.

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Nvidia: Cost to Compute

Weekly Stocktake / By VCS Agency

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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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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