RiverPark Long/Short Opportunity Fund Q2 2024 Portfolio Review

The following segment was excerpted from this fund letter.

We started the second quarter 92.74% long, 22.26% short, and 70.47% net. We ended the quarter with slightly less gross exposure and more net exposure at 94.25% long, 18.13% short, and 76.11% net.

Below we describe some of our top and bottom performers.

Portfolio Review

Top Contributors

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Nvidia: NVDA shares were our top contributor in the quarter following blowout 1Q results and guidance driven by strong data center sales (+427% year-over-year). The company reported revenue of $26 billion, up 262% year-over-year, and EPS of $6.12, up 462% year-over-year and 9% ahead of expectations. Revenue guidance for 2Q of $28 billion was 5% above very high expectations. The artificial intelligence arms race kicked-off by ChatGPT and Alphabet’s Bard, among others, has generated tremendous demand for Nvidia’s next generation graphic processors. NVDA is the leading designer of graphics processing units (GPU’s) required for powerful computer processing. Over the past 20 years, the company has evolved through innovation and adaptation from a predominantly gaming-focused chip vendor to one of the largest semiconductor/software vendors in the world. Over the past decade, the company has grown revenue at a compound annual rate of over 20% while expanding operating margins and, through its asset light business model, producing ever increasing amounts of free cash flow. Following recent results, Jensen Huang, founder and CEO of Nvidia stated in the company’s press release, “a trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process.”

Alphabet (GOOG,GOOGL): GOOG was a top contributor in the second quarter following strong first quarter earnings driven by better-than-expected Search and YouTube revenues and a reacceleration in the company’s Cloud business. AI advances helped improve targeting and measurement in the company’s advertising businesses, including in YouTube’s fast growing Shorts segment. Google Search revenue was $46 billion, YouTube revenue was $8 billion, and Cloud revenue was $10 billion, 3%, 5% and 2% better than expected respectively. Margins in both operating segments, Services and Cloud, were also ahead of expectations leading to $1.89 of EPS, 25% higher than estimates. With its high margin business model (42% EBITDA margins last quarter), continued strength across its core Search and YouTube franchises, and continued growth and expanding profitability in its still relatively small Cloud business, we continue to view Alphabet as among the best-positioned secular growth franchises in the market. Additionally, GOOG shares trade at a compelling 19x the Street’s 2025 EPS estimate, a discount to the Russell 1000 Growth Index.

Apple (AAPL): Apple shares were a top contributor in the quarter after a difficult start to the year. The stock was down nearly 11% in the first quarter, driven by factors we discussed in last quarter’s update, including an antitrust case, an Apple Watch patent dispute, and slowing China iPhone sales. Ultimately the company’s fiscal 2Q24 earnings report delivered a slightly better than expected quarter on both the top and bottom lines and guidance that was also better than investor expectations. Better 2Q24 revenue and gross margins were driven by stronger than expected Services revenues, which grew 14% year-over-year, continuing a multi-quarter trend of accelerating growth. Gross margins of 46.6% expanded from last quarter’s decade high of 45.9%. Guidance of $90 billion of revenue for 3Q24 was roughly in line with published expectations, reassuring investors. The stock also got a boost from research reports suggesting that iPhone sales may see a boost from an upgrade cycle driven by the upcoming rollout of Apple’s AI assistant. Although near-term trends are a bit muted, Apple is carrying lean inventory into an iPhone refresh cycle later this year and easing comps in the rest of its portfolio. With an installed base of 2.2 billion active devices and significant growth in the company’s recurring revenue Services segment, we believe that Apple remains one of the most innovative, best positioned and most profitable companies in the mobile technology industry.

Top Detractors

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Disney (DIS): DIS was the top detractor in the quarter following a mixed earnings report, with operating income, EPS, and free cash flow all roughly in line, but weakness in segment revenue and operating income. The Entertainment segment saw slightly weaker than expected revenue and operating income due to lighter Content Sales and Licensing partially offset by stronger Linear Networks and Direct-to-Consumer (‘DTC’). The DTC business grew, with Disney+ Core adding more subscribers than expected (+6.3m v +5.8m) and generated $47 million of operating income versus expectations of breakeven. The Sports segment generated revenue below expectations, but operating income was better than expected, both driven by ESPN. The Experiences segment beat both revenue and operating income expectations on the back of strong international parks results, price increases at Walt Disney World and cruises, but Disneyland unexpectedly had negative growth in the quarter. In addition, guidance for slightly weaker Experiences revenue and operating income growth as visitor growth normalizes post-Covid also weighed on the stock. DIS is blessed with a deep library of unique content that includes both live sports (providing large, non-time shifted audiences) and incomparable brands, including Disney, Marvel, Pixar and Lucasfilm, as well as the ABC network, which make it among the best-positioned media companies in the new landscape to combine multi-channel and DTC distribution. In addition, its theme park, cruise and theatrical businesses continue to be generational rites of passages for children and young adults around the world. We think CEO Bob Iger is doing a steady job rationalizing investments in each of the company’s segments, which should lead to higher and more consistent profitability at the theme parks, better value realization in the linear assets, and consolidation of the company’s DTC assets leading to higher profitability sooner. We therefore expect DIS to grow its free cash flow significantly over the next 3-4 years, from its depressed $1 billion in 2022, to more than double 2023’s $4.9 billion, exceeding its previous $10 billion peak in 2018.

Adyen (OTCPK:ADYEY): ADYEN was a top detractor in the quarter following a 1Q24 trading update that included higher than expected volumes (+46% year-over year growth versus 37% expected), but with lower-than-expected take rates (147 basis points versus 155 basis points). This resulted in revenue that was slightly below consensus estimates. Payment volume growth was strong across all segments with digital leading the way at +51%. The 3-basis-point decline in take rate was attributed to existing customers growing rapidly and hitting price reduction tiers. We believe that volume growth is more important than near-term take rate movements. The company operates a global payments platform, integrating the full payments stack to serve modern global merchants. Unlike many of its legacy peers, Adyen’s roots are in technology designed specifically for multi-platform sellers. The company’s platform was fully built in-house on a single code base and operates as a single, integrated end-to-end network, giving it an advantage over competitors that have separate platforms for gateway, risk management, processing, issuing, acquiring and settlement. The company’s single platform also allows its merchant customers to use one payment service provider globally across all commerce channels (in-store, on the web, and on mobile devices), providing them lower payment costs, a single back end, a single contract and better visibility of end customers. We believe that the transition to next-generation, single-provider, omni-channel payment processing is in its infancy, and we believe the company will continue to take market share against its competitors. The company should have healthy revenue growth in the coming quarters as it rolls out more products and features, and we expect margins to expand as it leverages its fixed cost infrastructure.

Five9 (FIVN): FIVN was a top detractor in the quarter after reporting better-than-expected first quarter earnings accompanied by revenue guidance for the second quarter that was slightly below expectations. The 2Q24 shortfall is related to the pace at which some large deals will realize revenue through the year, while the company kept its full year 2024 guidance the same. FIVN reported $247 million of revenue, 13% year-over-year revenue growth and $7 million higher than estimates, and $0.48 of EPS, 17% growth and $0.10 better than estimates. Five9 is a leader in providing cloud-based software to contact centers. The company’s suite of applications provides contact center agents with a unified communication platform (voice, email, text, chat, web, social) and a desktop of tools to help agents engage customers more quickly and effectively. FIVN is well-positioned as contact centers transition to the cloud and has high customer retention (112% net revenue retention last quarter). The company doubled its strategic sales team over the past year and signed new partnerships with AT&T, CDW and Microsoft. We believe the company can grow its top line in the high teens, while improving on its 1Q 61% gross margin and 11% operating income margin, leading to 20%+ EPS growth for the foreseeable future.

Top Ten Long Holdings

Below is a list of our top ten long holdings as of the end of the quarter:

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Below is a list of the key secular themes represented on both sides of our portfolio as of the end of the quarter.

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