U.S. investors may not be familiar with Prosus (OTC:PROSY), one of the largest and newest European tech stocks. Prosus is a new company formed last September when South African media and investment firm Naspers (OTC:NPSNY) spun off its global internet investments from its core South African media and e-commerce operations into a stand-alone company.
Though Prosus is a spinoff, it was the largest part of Naspers, accounting for almost all of Naspers' net asset value. That was mainly due to Prosus' 31% stake in Chinese e-commerce giant Tencent Holdings (OTC:TCEHY), which began as a $32 million investment in 2001, but has since grown into a massive $142 billion asset.
However, Prosus owns a large portfolio of global internet businesses above and beyond just its stake in Tencent. Taken together, it seems poised to benefit from the long-term digital trends likely to be accelerated by coronavirus. Even better, Prosus trades at a significant discount to the value of those assets.
Prosus' largest holding by far is its holding in Tencent. In fact, Prosus is worth less than the value of its Tencent stake alone. Leaving the idiosyncrasies of that alone, Tencent's portfolio alone is very well suited to withstand coronavirus.
First, Tencent is the largest online video game publisher and distributor in the world. On its recent earnings release, Tencent reported strength in its core mobile and online gaming empire, and its billion-plus-user social network WeChat also delivered solid advertising results. It's also the largest video-streaming service in China, having recently overtaken rivals. While the company did disclose that its payments and cloud business had slowed due to the COVID-19 breakout this quarter, Tencent also said that its associated marketing costs had come down, keeping profits level, and that it expected to continue to take share in cloud computing once the delay in new installations picked up.
In addition, Tencent owns large 20% stakes in both Chinese e-commerce player JD.com (NASDAQ:JD), which just posted a solid quarter and seems poised to take market share due to COVID-19, and Meituan-Dianping (OTC:MPNGF), the largest food delivery app in China, and a rare food delivery service that is actually profitable.
At a very broad level, Tencent's portfolio of online video games, social media, streaming video, electronic payments, e-commerce, and cloud computing is ideally suited to benefit from the trends accelerated by COVID-19.
Prosus' next biggest bet is on food delivery. Although that segment is slightly smaller than the Prosus online classifieds segment in terms of revenue, the food delivery segment was growing much faster at 69% growth in the half-year ended in September 2019.
Prosus has touted its food delivery investments as its next big second act after Tencent. Currently, the company has stakes in India's Swiggy, the leading food delivery service in India; iFood, the leading food delivery service in Brazil, with operations in Colombia and Mexico; and Delivery Hero (ETR:DHER), which is headquartered in Germany but has operations in 40 countries, including the recent acquisition of Woowa Brothers, the number one food delivery company in South Korea.
With COVID-19 making it difficult or impossible for consumers across the world to go out to restaurants, it's likely food delivery will get a boost in the current environment. While the coronavirus pandemic will eventually pass, the current period may only bolster what was already a strong growth trend.
Classifieds and fintech
Prosus' holdings in classifieds and fintech have a more mixed picture in this environment. While a recession may lead to a slowing or reversal of growth in commerce and payments, the stay-at-home nature of the crisis could actually bolster the war on cash as consumers turn to electronic payments over traditional cash use.
Prosus owns a broad portfolio of online classifieds, including OLX Group, with operations in Russia, India, Brazil, and 35 total markets around the world, as well as Letgo in the U.S. These websites allow people to buy and sell used goods over the internet, even large-ticket items such as used cars, as well as host job listings. Prosus' online classifieds business is the second-largest segment by revenue after Tencent, and grew by 38% in the six months ended in September on an organic basis.
Prosus also owns six different electronics payments companies, including 100% ownership of PayU, a global payments processor and cross-border payments platform, with a presence across 18 different global markets. Prosus' other payments companies include U.S.-based remittance company Remitly, as well as other smaller digital lenders in India and Brazil. In the six months ended in September, Prosus' payments businesses grew 20%.
The black sheep: Trip.com
If there's one Prosus business that's suffering right now, it's definitely its 5.6% stake in Trip.com (NASDAQ:TCOM), formerly known as Ctrip. Prosus was a former investor in MakeMyTrip, which was a leading online travel agent in India, but Prosus exchanged its MakeMyTrip stake for shares in China's Ctrip in April of last year.
That business may be hit quite hard in the current no-travel environment; however, Prosus' stake in Trip.com only equates to around $790 million at Trip.com's current valuation. That's about 0.5% the size of the Tencent investment alone.
The best part
Prosus owns even more ventures than I've listed here, yet Prosus still trades at a substantial discount to the value of its Tencent investment alone. Prosus' market capitalization is just $112.5 billion, or about 21% lower than the value of its Tencent stake. If the remaining business are worth about $15-$20 billion, the discount rises to a whopping 30%.
That is, of course, a crazy discount, which can be explained by both the discount investors sometimes give conglomerates, as well as other technical factors. Prosus is newly public as of last September and is still majority-owned by Naspers. Those factors have made Prosus underweighted in European indexes as of now.
Management has taken steps to try and close the valuation gap, and I expect its actions, along with the company becoming better-known among investors, could do just that. Meanwhile, its portfolio of internet businesses should mostly weather coronavirus quite well, then thrive once we get to the other side of the crisis.