18.09.18 | Portfolio update!

By Jessica Sier 18 September 2018 6 min read

Newsletter: Published Tuesday, 18 September 2018.

  • lululemon athletica;
  • Shopify;
  • Audinate;
  • Nearmap;
  • Why does Spaceship have so many Chinese tech companies?

It’s that time of the quarter again when Spaceship’s investment team re-visits the companies in your Spaceship Universe Portfolio and Spaceship Index Portfolio.

We use the Spaceship “Where the World is Going” (WWG) criteria, which you can read about here, to decide whether or not a company is up to scratch for the Spaceship Universe Portfolio.

This quarter we are adding lululemon athletica and Shopify, each of which are Canadian companies but listed in the United States (lululemon athletica is listed on the NASDAQ, and Shopify on the NYSE), and Audinate and Nearmap, each of which are listed in Australia on the ASX, to the Spaceship Universe Portfolio.

We are removing JD.com, Intel, Impedimed and Integrated Research from the Spaceship Universe Portfolio. Next week we'll detail why these companies don’t fit the WWG criteria any longer.

lululemon athletica

The idea of spending $100 on a pair of exercise pants utterly blows my mind.

But apparently I’m the only person on planet earth who feels this way, because lululemon - the manufacturer of contemporary exercise clothes - is entering a pleasing growth phase and fits the Spaceship criteria to a tee.

lululemon is a yoga inspired, technical athletic company for women and men, based out of Canada. It is a vertically integrated retailer - meaning they own their own supply chain - and have full control over their inventory.

As of September, 2018 lululemon has 415 stores, with most of them in the United States. But they are rapidly expanding in Australia, New Zealand and throughout Europe and Asia. We've assessed lululemon (having regard to our WWG criteria) and believe lululemon has a long runway of growth, with 12% of their sales outside North America. To put this in context Nike's sales outside North America is 64%.

As it stands, e-commerce accounts for 23.1% of lululemon's revenue and menswear accounts for around 22% of the business.

Spaceship thinks lululemon is one of the few companies benefiting from this consumer shift from products to experiences (ie. we would prefer to spend our money doing cool things rather than just having cool things). Exercise and the rise of western yoga are some of the things people seem happy to spend top dollar on and we believe lululemon is well placed to capitalise on that.

As of January 2018, lululemon has $US990 million in cash and short-term investments with no debt and owns 45 patents on its athletic gear.

The business has also recently welcomed a new CEO, Calvin McDonald who comes from Sephora, the makeup retailer.


Shopify provides all the e-commerce infrastructure for small to medium businesses in the cloud.

Merchants use Shopify’s software to design, set up, and manage their stores across web, mobile, social media and marketplaces like eBay and physical retail.

There are hundreds of thousands of businesses powered by Shopify including Tesla, Red Bull, and Kylie Cosmetics.

We’ve split their business into two segments, Subscription and Merchant Solutions.

Shopify’s first fee is a monthly subscription charge for an online storefront. Selling software to small businesses is hard because churn rates can be high, but the successful companies more than make up for it by building their own ecosystem and community with Shopify.

This powers distribution engines that sell their products for them, which Shopify has done through SEO (search engine optimisation), content marketing, and their partners.

They also sell separate services, like shipping and payments, that help merchants do business better, through their Merchant Solutions segment. This works because Shopify charges their fees as a percentage of the transaction, which means they make more money when their merchants make more money.

This is a great alignment of incentives that not many other businesses have.

Shopify also has a powerful developer and theme designer ecosystem. Businesses can build their own stores to look and feel exactly how they want but powered by Shopify’s e-commerce platform.

Engineers are some of the hardest and most expensive employees to retain and engage, by providing a platform for small businesses, Shopify removes the need for small businesses to employ engineers.

This is great cost saving and it means that they can benefit from talent that they may not have been able to attract via employment.

It’s a smart way to market, we think.


Audinate owns a technology platform called Dante (“Digital Audio Network Through Ethernet”), which allows delivery of uncompressed, multi-channel digital audio over a ethernet network.

The Dante platform distributes digital audio signals over computer networks, and is designed to bring the benefits of IT networking to the professional AV industry.

Dante is a licensed technology, which means companies that manufacture Dante enabled products pay for licensing fees and the proprietary hardware that resides inside the audio products such as chips, modules and cards. That’s how Audinate makes its money.

Audinate also makes the vast bulk of its revenue from hardware sales to OEMs (Original Equipment Manufacturers) such as Yamaha, Harman and Bose. Yamaha is a substantial shareholder in Audinate.

The industry is currently in transition from legacy analogue audio installations to networked audio installations.

Audinate should benefit from this trend as end users (typically commercial sector, like Sydney Trains) adopt audio networking in professional AV Installations. And, Audinate is protected by patents and is beginning to benefit from network effects with nearly 5x as many products as its competitors.


Nearmap fly drones over the earth and take really high quality pictures.

They sell these current and changing photomaps to over 8,000 subscribers around the world.

Nearmap utilises HD Aerial Imagery - meaning they are bolted into planes - as satellite imagery lacks necessary detail and drone photography lacks consistency.

Nearmap also have a 3D mapping technology which has been a large driver of growth thanks to an increase in pricing and a pick up in how other companies can use the technology.

Naturally, Google Maps is a competitor but the main difference at this point is Nearmap captures high resolution aerial imagery 6 times a year at 7 cm per pixel unlike Google Maps which take satellite photos every 2-3 years.

Customers have access to imagery within a matter of days as well as a large gallery of historical captures. Companies use the imagery and data to make better informed decisions.

For example flying over flood affected cities so that insurance claims can be instantly assessed.

The Australian operations are funding the US expansion. Growth in the US has been stronger than expected Nearmap as a group could be free cash flow positive in FY19.

Reader question.

Q: Why does Spaceship have so many Chinese technology companies when there’s a Trade War going on?

Oh yes, Chinese technology shares were battered and bruised this quarter.

The MSCI Asia Pacific Information Technology Index has slumped 11% this year, while its S&P 500 Index version has rallied 17%, according to Bloomberg data.

And yes, this was largely because the United States and Chinese authorities started a Trade War with each other.

A trade war is when governments put barriers, like tariffs and taxes, on goods going into their countries.

The idea is to make foreign products more expensive and force companies to purchase locally manufactured goods.

The war part is when other countries react angrily to the market interference and implement tariffs and taxes of their own.

The United States put some taxes on Chinese goods going into their country. And then China put some taxes on American goods going to China. Chinese shares fell sharply as a result.

What is peculiar about the Chinese share selloff is, most of these companies (think Alibaba, Tencent, JD.com) build, market and sell their products to Chinese people, not American people.

So the impact of a higher tax on the exports of their products is...not much at all? It will cost Chinese people the same as before to buy from these companies whose revenue and profits will stay the same.

This is a neat example of what happens when investors read blaring headlines, lose their heads a bit, panic sell and don’t think through the true implications of a change in the economic landscape. So we’re not too worried about the selloff in Chinese technology companies.


We’re sharing with you our thoughts on the companies in which Spaceship Voyager invests for your informational purposes only. We think it’s important (and interesting!) to let you know what’s happening with Spaceship Voyager’s investments. However, we are not making recommendations to buy or sell holdings in a specific company. Past performance isn’t a reliable indicator or guarantee of future performance.

Lululemon athletica, Shofity, Audiate and Nearmap will be added to the Spaceship Universe Portfolio this week.

These companies will not be added to the Spaceship Index Portfolio.

Words by
Jessica Sier Right Chevron

Jessica Sier is a financial journalist. Prior to that she led content at Spaceship and was a reporter at the AFR where she discovered that breaking down financial jargon was a public good.

18.09.18 | Portfolio update!