Project $1M: On Track After 2024’s First Half

Project $1M is a long-term buy and hold portfolio with a focus on letting high-quality businesses compound and scale free of interruption and interference. The portfolio was started back in 2015 with the aim of turning approximately $275k into $1M by the end of 2025. The aim of the project was also to outperform the S&P 500 over this period.

I stacked the portfolio with businesses that had unfair competitive advantages, which would allow them to grow through a full economic cycle, which I figured we would experience over a decade. The business also was favorably exposed to secular tailwinds and natural shifts in the economy to online payments, advertising, and e-commerce.

I overlaid this framework with a focus on businesses that were financially disciplined, generating high ROE’s, and then took a ‘hands-off approach’. The effect of a hands-off approach is the portfolio’s winners run and concentrate themselves. In the Project $1M portfolio, this concentration is as strong as it’s ever been, with the top 5 positions accounting for 64% of the total portfolio.

The first half of 2024 has generally been fairly positive and continued on with the good performance from the 1st quarter. The portfolio has returned 13.6% for the year so far. This is trailing the S&P 500, which has returned 17.64% for the year to date. Still, the portfolio has meaningfully outperformed since inception and has returned 15.3% vs 13.6% for the S&P 500.

Table created by Author includes Veeva (VEEV), ServiceNow (NOW), Alphabet (GOOG) (GOOGL), Snowflake (SNOW), Adobe (ADBE), Amazon (AMZN), Salesforce (CRM), Nanosonics (OTCPK:NNCSF), ARK Genomic (ARKG), Datadog (DDOG), Atlassian (TEAM), Shopify (SHOP), ASML (ASML), Adyen (OTCPK:ADYEY), Mastercard (MA), Visa (V), MercadoLibre (MELI), Sea (SE), Pro Medicus (OTCPK:PMCUF), Enphase (ENPH), CSL (OTCQX:CSLLY), Meta (META).

1H ’24 Comments

A ‘Red Letter Year’ for Pro Medicus

It needs to be acknowledged that luck plays a role in portfolio management. Fairly early on in the portfolio’s life, I grew concerned that my exposure to Nanosonics was too large. In an effort to better manage the allocation to earlier stage, speculative issues, I shifted some of this exposure toward Pro Medicus. That decision proved a very good one.

Pro Medicus continues to really be the portfolio’s star and is heading to 20x return on the initial investment. The business again had very good earnings, delivering $87.4M revenue, up 28.5%. More impressively, net profit came in at $46.5M, up 39%. It realized an operating profit margin for the second-half of the year of a massive 72%.

The business is rapidly becoming the preferred provider for the digital delivery of radiology imaging in North America, and secured 9 large contract wins, including a $140M 10yr Baylor Scott contract within the last year.

Further, its having increasing success in moving beyond radiology into other ‘ologies’ such as cardiology, with a number of recent deals demonstrating success in selling into this space.

The business expects AI to become increasingly important and act as an additional check for identification of conditions and alert radiologists to areas of concern. Pro Medicus not only continues to solve productivity issues for radiologists, but increasingly helps employers reduce or avoid burnout of these limited, highly compensated resources.

There are still meaningful growth opportunities to come beyond this. Even though Pro Medicus US penetration is still only 7% with a long runway ahead of it, Pro Medicus has its eye set on additional international markets. Pro Medicus also achieved a key milestone with US Fed Ramp approval that will allow it to sell into government institutions.

The Re-emergence of Sea?

I have previously acknowledged how I got the investment in Sea wrong. This is less a comment regarding the fundamentals of the business, and more a comment in relation to the timing of the investment.

I was in a bit of a hurry in 2021 to rapidly existing my Chinese holdings in Alibaba (BABA) and Tencent (OTCPK:TCEHY) and Sea seemed like a good alternative for these funds. Unfortunately, this meant my entry price into the position occurred at what would turn out to be near peak share price.

Sea has since struggled, particularly with its Garena gaming division, and the fallout from its ill-advised and unchecked international expansion. Still, I always believed there was meaningful promise in the business, and Sea may have now finally turned the corner.

For the first time in recent quarters, all three of Sea’s business units displayed very good growth and progress at the same time. On a top line basis, Sea increased revenue by 23% delivering $3.8B. The business also delivered positive GAAP earnings per share.

E-commerce revenue grew 34% annually to $2.8B. Sea managed to improve take rate and margins to deliver stronger revenue growth, with less sales and marketing expense then what’s been expected.

While digital entertainment revenue fell 17.7% annually, it looks fairly evident that there will be better times ahead. There was 20% plus annual growth in bookings for Garena. Bookings are an early indicator of revenue traction, and this bodes well for a recovery in revenue growth for Sea through the year.

Garena paying users improved from 7.9% of total users to 8.1%, which boosted quarterly paying users by 22% to 52.5M.

Sea’s Digital financial services segment was also strong. Digital financial services increased revenue 21% to $519M. Sea has advanced nearly $3.5B in loans as at the end of the quarter, which is up 40% annually. Digital financial services delivered 37% of Sea’s total operating cash flow, while keeping non-performing loans in check.

I’m increasing in my conviction that Sea should be able to develop a 4th pillar of revenue generation with advertising, following in the footsteps of MercadoLibre. SE is steadily increasing advertising revenue as a percentage of total GMV on the platform, and sellers paying for ads increased 20% annually. Sea is focusing on improving its ad rates, which are currently below industry average.

I haven’t given up on Sea, and have been very encouraged by what I’ve seen from the business this quarter.

Nobody Does it like MercadoLibre

While there is understandable reluctance amongst some investors to consider Latin American as an investment destination, I am increasingly of the opinion that very few do it better than MercadoLibre globally. The business demonstrated that again this quarter.

MercadoLibre delivered truly knockout earnings. The business grew its gross merchandise volume at 83% on an FX-neutral, unadjusted basis. Revenue increased 113% annually. MELI saw strong results from its commerce business, up nearly 131%, and its Fintech business, up 92%.

Translated into US dollars, these results continue to be equally impressive. Gross merchandise volume of US$12.6B increased 20% annually. Revenue of $5.1B increased 42% annually. Most encouraging was that MercadoLibre saw acceleration in items sold, coming in at 421M, up 29% annually, and unique active buyers, which increased 19% annually. This was the fastest increase in over 3 years for items sold and unique buyers.

This is evidence of MercadoLibre’s flywheel accelerating, where buyer growth translates into GMV growth, which translates into new merchant acquisition, restarting the whole virtuous cycle.

MercadoLibre is also steadily selling more items to each unique buyer. This now stands at approximately 7 1/2 units per quarter. MELI’s Fintech business also continues to show very strong progress. MercadoLibre’s emerging asset management business has $6.6B in assets under management, growing at 86% annually.

Another element of the MercadoLibre investment thesis that I’ve been carefully watching is the development of its Advertising business. There was further progress in ads this quarter, with Ad revenue now equivalent to 2% of GMV. This was just 1.5% this time last year. Ad revenue grew 51% annually in 2024. Remember, this is very high margin revenue and will help contribute to MELI’s cash flow.

All of this was delivered with strong financial discipline and mindful of the bottom line. The business delivered a net income margin of 10.5%, the highest since 2017. Its free cash flow of $678M was delivered with an approximately 12% margin. Both are very impressive for a business still growing its top line so aggressively.

MercadoLibre has been a great addition to the portfolio since inception. There is still more to come here.

Future Outlook

We are now down to a little over 1 year remaining for the Project $1M portfolio life. It’s hard to believe that the final innings is rapidly approaching. I’m within roughly 10% of the portfolio goal. Given the Fed Reserve is embarking on lowering interest rates and a ‘soft landing’ remains on the cards, I remain optimistic that the end goal can be achieved.

I also continue to remain on the lookout for promising holdings to add to the portfolio, to replace some of the laggards. As I have progressed as an investor, I am a little less interested in the very early stage, more speculative small-cap companies (i.e. Nanosonics), and more interested in the more mature, dominant compounders (i.e. MercadoLibre) that can just progressively grow earnings and cash flow at very predictable rates.

To that end, names like FICO (FICO), Moody’s (MCO) remain high on my list for potential future additions.

I will be back at the end of Q3 with another update, and wish all of you the best for the rest of the summer.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.