Reflections: Flying under the radar

Intuitive Surgical is one such example. A pioneering force in the medical technology sector, it has revolutionised surgery with its innovative robotic systems. At the heart of this revolution is the da Vinci Surgical System, a marvel of engineering that has transformed minimally invasive procedures, offering unparalleled precision and dramatically improving patient recovery times.

As healthcare continues to evolve, Intuitive Surgical remains at the cutting edge with a number of new products.

We previously wrote about the da Vinci 5’s 10,000-fold increase in computing power compared to its predecessor which allows surgeons to perform complex procedures with enhanced dexterity and control. Another example is the company’s new Ion system, a robotic-assisted platform for minimally invasive lung biopsies which has achieved a remarkable 97 per cent success rate in reaching its targets.

To put this into perspective, using the Ion system for a lung biopsy is akin to navigating from Oxford to London, or Osaka to Kobe, with a state-of-the-art GPS system, while traditional methods are more like making the journey using only road signs and intuition. This breakthrough is particularly crucial in the fight against lung cancer, the leading cause of cancer deaths worldwide.

Since our original purchase in 2010, the stock has delivered a 12x return on our original investment, earning it a coveted star on the Long-Term Global Growth boulevard. However, with a maximum drawdown of 48 per cent, our ownership hasn’t been without its challenges.

As the market remains fixated on short-term news, more volatility is likely. Recent excitement has risen around the replacement cycle driving the company’s share price to all-time highs. However, given the extra costs involved in launching new products, Intuitive’s margins are likely to fluctuate over the short term, with market sentiment predictably following suit.

With our long-term time horizons, we can be patient, waiting for margins to rebound and the expanded opportunity set from Intuitive’s major new products to become more apparent. That being said, given the recent share price rises, we are updating our valuation analysis.

Next up is Atlassian which has experienced a severe drawdown of its own during our ownership – nearly 70 per cent. Despite this it has delivered a 7x return on our initial investment in 2016. From its beginnings with a single product, Jira, Atlassian has grown into a $42bn enterprise, strategically acquiring and integrating over 20 organisations. Today, Atlassian's suite of collaboration tools serves over 260,000 customers across 190 countries, including over 80 per cent of Fortune 500 companies.

Growth has been fuelled by the company’s innovative "land-and-expand" strategy - initially securing customers with a core offering and then cross-selling additional products and services over time. Atlassian's cloud transition has been particularly impressive, with cloud revenue surpassing $2bn in FY23 and millions of users migrating from on-premises solutions.

The company's commitment to innovation is evident in its robust R&D investments, which have yielded AI-powered features like Atlassian Intelligence, now used by over 30,000 customers, and tripling its monthly active users since its December 2023 launch. However, the company also faces a critical juncture as co-founder and co-CEO, Scott Farquhar steps down. With 70 per cent of Long Term Global Growth invested in founder or family-run businesses, we strongly believe in the benefits this type of ownership structure brings – a long-term mindset, alignment of interests, and stability to name a few.

In order to gain valuable insights into how the company is navigating such a change, we recently met with Anu Bharadwaj, Atlassian’s President. As we look ahead, Atlassian's earnings growth trajectory remains compelling, as the company focuses on monetising existing customers, particularly through upselling and cross-selling to enterprises. With her experience heading Atlassian’s Cloud business with a focus on enterprise, Bharadwaj appears well placed to help oversee this harvesting phase.

Last to the stage is Tencent. Quietly establishing itself as an indispensable pillar in China’s digital landscape, it has become the world’s largest gaming company, largest online entertainment platform, and the largest mobile payment platform in China, as well as a significant player in China’s cloud infrastructure and advertising.

Tencent’s WeChat platform is one of the deepest social networks in the world boasting over 1.35 billion monthly active users.

Between 2004 and 2023, the company recorded a revenue growth CAGR (compound annual growth rate) of 40 per cent. 2022 was the only year the company showed negative revenue growth, mainly driven by the Chinese technology crackdown in 2021.

Despite facing regulatory challenges in recent years, Tencent has shown resilience and adaptability, engaging with over 60 high-level Chinese officials to align its growth with national technological ambitions. A future with two parallel ecosystems for Generative AI – one in the US and one in China looks increasingly likely and Tencent’s investment in this space ready it to lead the next wave in AI advancements. However, our investment case does not rely on Tencent’s place in China’s AI future – over the next five years, the key remains in its existing businesses, such as the monetisation of WeChat advertising.

Using our 10 Question Stock Research Framework, we recently reviewed the opportunity set for Tencent and our upcoming stock discussion will shed further light on the upside potential going forward. For now, a 22x delivered return places Tencent firmly in the LTGG hall of fame.

As we conclude our spotlight, it's clear that the true essence of long-term investing lies in recognising potential that others may overlook. Intuitive Surgical, Atlassian and Tencent each embody the spirit of innovation, adaptability, and transformative growth that we seek in our investments. Though they may not always be at the forefront of investor consciousness, their contributions to portfolio performance have been substantial. Moreover, their journeys remind us that market volatility and short-term setbacks are often mere chapters in a longer, more compelling narrative of value creation.

As we look to the next twenty years of Long Term Global Growth, we remain committed to identifying and supporting outlier companies.

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