For the past 20 months, Wall Street and investors have enjoyed a historic rally in the benchmark S&P 500. Since losing more than a third of its value following the initial wave of the coronavirus pandemic, the broad-based index has more than doubled.
Yet, in spite of these enormous gains, billionaire money managers are still finding value in this market. With Form 13F's being filed with the Securities and Exchange Commission last week, Wall Street and investors were given an under-the-hood look at what the brightest investment minds were up to during the third quarter (Q3).
What's readily apparent is billionaires were busy buying growth stocks hand over fist.
Jim Simons (Renaissance Technologies): Tesla Motors
Billionaire money manager Jim Simons runs a gigantic hedge fund, Renaissance Technologies, which held over 3,000 positions at the end of Q3 and had more than $130 billion in assets under management. One high-growth stock Simons and his team couldn't get enough of is electric vehicle (EV) leader Tesla Motors (TSLA 10.97%).
According to Renaissance Technologies' 13F filing, 610,300 shares of Tesla were purchased during Q3, which effectively quadrupled Simons' stake in the company. As of the end of Q3, Tesla was the 12th-largest holding for Renaissance.
The answer to "Why Tesla?" likely revolves around the company's numerous first-mover advantages. It's the only auto company in more than 50 years to build itself from the ground up and reach sustainable mass production. Tesla looks to be well on its way to topping 800,000 vehicles delivered in 2021, with two additional gigafactories set to be up and running in the coming years.
What's more, Tesla Motors has clearly identifiable advantages when it comes to battery range, power, and capacity, relative to its competition. Having this edge helped drive Tesla to its juiciest operating profit on record in the third quarter.
Of course, there are reasons to be extremely skeptical of Tesla given its greater than $1 trillion market cap and the capital being invested on EVs, autonomous vehicles, and battery research by the likes of General Motors and Ford Motor Company. My belief is it's going to be difficult for Tesla to maintain its operating advantages over the long haul, which makes its current stock premium a bit precarious.
Furthermore, a non-negligible portion of Tesla's net income over the past 1.5 years has derived from selling renewable energy credits to other automakers. Without these credits, Tesla's unsightly trailing 12-month price-to-earnings ratio would be a lot higher than its current reading of 358.
Chase Coleman (Tiger Global Management): Sea Limited
Unlike Simons, billionaire Chase Coleman runs a more focused fund at Tiger Global Management. Coleman oversees north of $52 billion in assets under management and holds stakes in 162 securities. The one he and his team couldn't stop buying in the third quarter is Singapore-based Sea Limited (SE 4.26%). An additional 265,400 shares were bought in Q3, firmly solidifying Sea as Tiger Global's third-largest holding.
What makes Sea Limited so desirable from an investment perspective is its three fast-growing operating segments.
For the moment, only its digital entertainment segment is generating positive earnings before interest, taxes, depreciation, and amortization (EBITDA). The company ended Q3 with 729 million quarterly active mobile gamers. But what's far more impressive than its aggregate gaming community is that 12.8% of these users paid to play. Not only has this conversion rate been steadily increasing, but it's many multiples higher than the industry pay-to-play average.
Second, Sea's digital financial services division continues to grow like a weed. The company ended Q3 with more than 39 million paying mobile wallet customers. With Sea targeting a number of underbanked regions, this tool, which can offer access to basic financial services, could prove powerful.
Third, and arguably most important, Sea's e-commerce platform, known as Shopee, is firing on all cylinders. Gross orders more than doubled (again!) in Q3 from the prior-year period, with $16.8 billion in gross merchandise value (GMV) being transacted. This works out to an annual run rate of $67.2 billion in GMV. For added context, Shopee saw $10 billion in GMV in the entirety of 2018. That's how quickly this segment is growing, and why this company deserves a hefty premium.
Ken Griffin (Citadel Advisors): Nio
Lastly, there's billionaire Ken Griffin whose fund, Citadel Advisors, has stakes (including put and call options) in thousands upon thousands of securities. Perhaps the most interesting move of the third quarter was purchasing more than 2,800,000 shares of EV-focused auto stock Nio (NIO 4.64%). This buy more than tripled Citadel's previous ownership in Nio, and it lifts the company into Citadel's top-500 holdings by market value.
As with Tesla, the bullishness surrounding Nio is pretty straightforward. Most major countries have agreed to take measurable steps to fight climate change. Pushing EVs and other clean-burning energy sources is likely the easiest way to reduce our carbon footprint. Nio is headquartered in the largest auto market in the world (China), meaning it's at the epicenter of what should be a multi-decade vehicle replacement cycle.
Over the past two years, Nio has done a good job of addressing its critics. The company raised a mountain of capital to fund its expansion, and it's tripled its quarterly deliveries from 8,224 in the fourth quarter of 2019 to 24,439 in Q3 2021. Were it not for global semiconductor chip shortages, Nio would likely be on its way to an annual run-rate of 150,000 EVs.
The company is also leaning on innovation to do the talking. Aside from unveiling a new vehicle each year, the company's battery-as-a-service (BaaS) program, introduced in August 2020, serves as a means to bolster brand loyalty and generate higher margins over the long run. With its BaaS program, buyers receive upfront discounts on new Nio EVs in exchange for paying a monthly fee. They'll also be able to replace or upgrade their batteries in the future.
With Nio expected to grow like a weed through at least mid-decade, and the company on track to turn profitable on a recurring basis by 2023, this big bet by Ken Griffin might pay off.