Prosus

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 3/5

Prosus is a global consumer internet group, primarily known for its large minority investments in leading technology companies, particularly Tencent, but also with a portfolio spanning classifieds, payments, fintech, food delivery, and online education.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Prosus operates as a holding company, owning a diverse portfolio of stakes in internet businesses rather than operating directly in those businesses. Key segments of its business include:

Tencent: Prosus’ largest asset by far. It holds a large stake in Tencent, a Chinese multinational technology conglomerate primarily known for its social media (WeChat), gaming, and fintech businesses.
Classifieds: Prosus operates a global classifieds business, with operations largely in Europe, Asia, and Latin America, including OLX, a prominent platform in emerging markets.
Payments and Fintech: Prosus holds investments in companies like PayU, a payment services provider in emerging markets.
Food Delivery: Prosus has investments in companies like iFood, a leading food delivery company in Brazil.
Other Ventures: The company has diverse holdings in emerging internet businesses, like online education, and other technology ventures.
Share repurchase programs and capital management: Posus intends to grow its value over time, while also generating strong returns for shareholders via buybacks. They have had a long and very succesful track record in this regard.
The company has announced plans to invest into the AI sector, however, it’s too early to determine any specifics.

Industry Trends & Competitive Landscape

Global Consumer Internet Growth: The consumer internet sector continues to experience massive growth driven by increased internet access in emerging markets and growth of e-commerce, digital payments, and online services.
Competitive Moats Many businesses are racing to capture these markets. This brings the concept of the economic moat, which describes a company’s ability to sustain its advantages over competitors. In the context of business growth, a moat describes a structural advantage that can protect revenue growth over time.
Varying Competitive Intensity: The competitive landscape varies significantly across the different sectors and geographies Prosus operates in. For instance, online classifieds in many emerging markets are consolidating, creating more defensible market positions. Payments and Fintech are competitive with both traditional financial players and other tech companies, while food delivery has a competitive dynamic involving localized players.
Technological Innovation: Technological innovation, such as in AI, also plays a crucial role. As new technologies enter the market, companies need to pivot to adapt, or leverage the tech to gain an advantage.

Financial Analysis

Revenue Distribution: Prosus’ revenue is primarily sourced from its subsidiaries and equity affiliates. Consequently, the company’s financial performance is heavily influenced by the operating performance of these businesses. This is particularly true for Tencent, which contributes the majority of earnings.
Margins: Since Prosus is a holding company, margins aren’t a direct measure. We will look at margins of companies owned by Prosus to see how the individual companies are performing.
Profitability: The degree to which profits translate into cash depends on capital investments.
Long-term performance: Prosus has a track record of buying and growing strong businesses over a long period of time, using this to boost their value.

Moat Analysis: 3 / 5

Prosus has a narrow moat that is dependent on the performance of the businesses they invest in. The company has built a lot of brand recognition, experience, and strategic expertise that gives them a very good advantage. They know what kind of businesses to buy, how to value them, and how to give them a framework to achieve their targets. However, most of their “moat” comes from their ownership of Tencent.

Network Effect: Businesses like Tencent’s WeChat and OLX Classifieds benefits heavily from network effects that attract more users and create a barrier to exit. However, the company doesn’t have 100% control over this business.
Intangible Assets: The brand equity of companies like PayU and iFood adds intangible value, but this is not always a guarantee of performance as new entrants are constantly trying to capture market share.
Cost Advantages: Some of its payments and fintech companies can achieve scale economies through efficient capital allocation.
Switching Costs In cases where they have their own direct businesses, there can be switching costs from B2B customers that use some services, however, this is a very small part of their operations.
Scale: Their size does provide an advantage in accessing capital and resources.

Moat Rating: A “3” is given because, while they have the ability to identify businesses with moats and help those companies achieve sustainable advantage, a lot of their success still depends on the performance of those individual companies, and some can fail to thrive (or even go bankrupt).

Legitimate Risks that could Harm the Moat & Business Resilience

Geopolitical Risk: A primary risk stems from Prosus’ exposure to emerging markets, including China, India, and Latin America. The most obvious is their investment in Tencent. Any changes in China’s government policies could impact Tencent, which heavily impacts Prosus. The overall geopolitical instability can have a dramatic effect.
Regulatory Changes: In emerging markets, there can be changes in financial laws that can directly impact the company’s financials.
Competitive Disruption: Disruptive technologies can severely impact existing portfolios. It is also highly possible that competitive forces in the consumer internet market could erode their current competitive advantage in other sectors, like classifieds and food delivery.
Performance of Investees: Prosus is vulnerable to bad news from its investees. If they underperform, it would severely impact the balance sheet.
Valuation: Overpaying for an acquisition can permanently destroy value. Since Prosus buys companies based on potential and not current value, they may overpay if their predictions are inaccurate.
Leverage: High debt burdens can also negatively impact value. Companies that have a lot of debt are more likely to go bankrupt.

Business Resilience: Prosus exhibits some resilience due to a diversified portfolio of investments. However, any severe downturn in the Chinese economy would greatly impact their performance because of its heavy weighting to Tencent.

Understandability Rating: 4 / 5

The business model is relatively difficult for a normal investor to understand. This is due to the nature of a holding company, the complexities of valuing their investments, and the many moving parts that impact their financials.

Rating: “4”. The core concept is rather simple to grasp, but understanding all the different moving parts requires a lot of work.

Balance Sheet Health: 3 / 5

Prosus has a mixed financial position:

Leverage: Prosus takes on more debt as their business has matured. More and more of their capital is now coming from debt rather than equity.
Holdings: While assets are valuable, its holdings are not cash and their market value can vary significantly depending on market sentiment.
Cash Flow: Cash flow tends to be consistent, however it relies on their investees.
Unstable Assets: Many of their assets are based on foreign companies in emerging economies. The current risk for emerging economies is high, and they can lead to unexpected losses.

Balance Sheet Health Rating: A “3” is given because of the company’s high debt levels and susceptibility to the performance of the investees. If their investments fail to generate returns, they could be in serious trouble.