Whenever I see a picture of Prosus CEO Fabricio Bloisi or read the subject line of one of his shareholder letters, I’m struck by how different his style is from that of his predecessor.
His appointment on July 1 2024 marked a shift from tight-fitting formal shirts to laid-back golf shirts. His shareholder letters often arrive outside of the traditional reporting cycle and have a conversational tone, as though he’s a founder speaking to a venture capital audience rather than traditional institutional shareholders.
This cultural shift didn’t go unnoticed by investors. If anything, it was applauded.
Like many others, I had added Prosus to my portfolio based on the likelihood of Bloisi cleaning up an ecosystem that had often felt as though it was handled more like a shotgun than a rifle. It looked as if Prosus could finally be more than an inefficient way to gain exposure to Tencent.
Fast-forward to now, and Bloisi and I find ourselves in an unfortunate position: the share price has given up most of the gains achieved after his appointment.
Using the US-listed American depositary receipt certificates as a dollar-based reference point shows that Prosus has gained nearly 15% since July 2024. That’s not terrible when viewed in isolation, but the Nasdaq-100 is up more than 55% over the same period, so it’s a painful underperformance.
Worrying signs
Yes, there’s an argument to be made that the index has been driven by AI infrastructure winners, with little attention paid to tech stocks that sit outside that tech stack. And yes, there isn’t much that Prosus can do about the whims of global capital flows.
But if you compare Prosus to Tencent, you’ll find that these two have delivered near-identical share price performances.
This is worrying, as the market appears to be completely uninterested in the Prosus ecosystem outside of Tencent, despite genuine progress having been made in turning Prosus into a positive free cash flow business.
It’s a remarkable outcome that creates a concerning asymmetrical risk. While the market has been unwilling to place a premium valuation on Bloisi’s strategy, that doesn’t mean it wouldn’t be willing to put a discount on it.
Put differently, if the businesses outside of Tencent become cash hungry once more, Prosus could underperform Tencent. Owing to what is happening in the food delivery vertical in the group, there’s a chance that we could revert to a “Tencent minus” situation.
The major issue is in Brazil, which is ironic, as iFood is the business that Bloisi built from 2013 until his appointment as Prosus CEO. iFood has 80% market share, an astonishing example of market dominance that speaks directly to Bloisi’s track record. The problem is that it used to have 85%.
A brutal increase in competition in that market has put a target on iFood’s back. Competitors are spending “irrationally” and “losing A LOT of money”, according to Bloisi. Yes, that’s exactly how the shareholder letter was worded.
Discipline in the face of heightened competition is a good thing, but iFood also can’t just sit back and watch its market share be eroded. Prosus highlights the point that iFood has been more resilient than many other global case studies in this sector, but that doesn’t change the reality of needing to respond to the threat.
Just to make life even spicier, this is happening just as Prosus is trying to make Just Eat Takeaway.com a success in Europe. Bloisi spearheaded a strategy of acquiring control of this asset rather than continuing with a significant minority stake in Delivery Hero. That’s sensible, but it did open the door for Uber to expand in the European market via an offer to Delivery Hero shareholders.
This means the food delivery vertical has a war to fight on two fronts. Wars are expensive things. The rest of the ex-Tencent ecosystem is called out in Bloisi’s letter as having positive momentum (specifically OLX, Despegar and PayU), but will that be enough?
The letter ends with a caution that investors should take note of: Prosus is “consciously trading short-term profitability for a stronger, more defensible and faster-growing business longer term”.
This is exactly what investors in the Bloisi era didn’t want to see. Instead of positive free cash flow that would be additive to the Tencent dividends, there’s a risk of the Tencent dividends being recycled into ecosystems that are fighting against venture capital-funded start-ups that care about market share rather than cash flow.
Bloisi’s true test is here.
