Dear investors and well-wishers,

The fund returned 6.1% in July, closing the month +40% for the calendar year-to-date. CurveBeam had a solid start to trading in a difficult market. We are playing for the long term outcome here, but the good news is that the IPO market is in fact open, for the right company.

CurveBeam’s first few days of trading. 

NVIDIA 

Nvidia posted another set of blow-out earnings, reporting $6.3 billion of GAAP net income for the quarter. Annualized, this gives a PE of 46, and on analyst estimates – which are probably conservative – Nvidia is trading on a forward PE of 31. This is some serious cash flow.

Source: NVDA company financials

UBS released a note suggesting Microsoft’s AI earnings will be restricted throughout 2024… due to a shortage of NVDA chips. And this is a company with a capex budget of ~$50 billion for 2024.

Having said that, there is no doubt that competition will arrive.

Purchasers have a strong incentive to foster competition, though with 84% share of the GPU market, Nvidia is clearly dominant, and can deploy immense resources to stay there (AMD is second with 12% market share, and Intel is a distant third with 4%).

Once again, we keep coming back to ASML, Taiwan Semiconductor, and the semiconductor supply chain. However market share ultimately lands, the market is clearly going to be substantial, and the bulk of those chips are going to be by ASML’s machines in TSMC factories.

The outlook for the startups buying these chips is much less optimistic.

If I had to guess, Google will implement powerful AI tools across search and their business suite, likely running on their own TPU silicon. Microsoft will dominate business applications along with and without OpenAI, mostly on Nvidia designs but with a healthy mix from AMD. And Facebook’s Llama models will be open source, unrestricted, and take the lions share of the rest.

It’s much harder to see where the other companies building Large Language Models fit long term at all.

They have been extremely successful at raising money, but it’s revenue that will determine the outcome (for investors anyway, insiders will be well looked after regardless!) And with options from Google, Microsoft/OpenAI, and a free alternative from Meta… it’s going to be tough for anyone to pay for anything else.

Our exposure to semiconductors represents about a third of the fund, weighted towards the companies mentioned above.

Life sciences

Life sciences sold off heavily in recent weeks, with major companies down 30%.

This may reflect growing concerns (or from a health perspective, optimism) over the impact of GLP-1 drugs on population health statistics. (We will soon have to stop calling these GLP-1 agonists as the next generation target two other hormones as well).

Only a year ago, one-way obesity trends and an ageing global population made companies treating heart disease, sleep apnoea, and other obesity-related conditions looked like one of the safest bets in the market. This is all less clear now.

Some of these concerns are more valid than others. Surgical interventions for weight loss are likely to become rarer, given the risks, especially when oral versions become widely available.

We are more positive on the prospects of these drugs, ahead of lofty expectations, but the medtech sell-off seems overdone. Ultimately we will all – very sadly – have to die of something.

To share one telling statistic, curing cancer entirely is estimated to increase life expectancy by only two to three years. Something else always gets you.

GLP-1 drugs since launch. Prescriptions can be tracked in the United States on a weekly basis. 

TransMedics

One new company we added to recently was TransMedics, which develops medical devices for transporting organs, dramatically extending the time organs can be supported outside a body from four hours, and increasing the distance these can travel.

TransMedics Organ Care Systems. Most of their revenue comes from OCS Liver

TransMedics grew revenue by 156% to $52 million at a 70% gross margin. The company is EBITDA positive and has narrowed it’s loss to net loss $1 million, which is quite an achievement given the investment required to become of the fastest growing companies of its scale.

TransMedics narrowed their loss to $1m while growing gross profits 156% from $20.5 million to $52.5 million

Traditionally, organs are transported in coolers, with hearts only lasting about four hours, a vanishingly short window to both transport an organ to where it’s needed, then conduct complex surgery.

TransMedics takes a different approach, keeping the organs warm and functioning, significantly extending the time available. If you have a strong stomach, there are plenty of videos online showing hearts visibly beating as they’re transported in machines like those below.

Given the time restrictions, organ donation has historically been a regional affair.

By extending transit times and building out US-wide infrastructure, TransMedics has ambitions to make organs available from anywhere to anywhere in the United States, which would significantly expand the number of organs available. This tackles a serious problem – there are 100,000 people waiting for donors, and many will die before the right organ is available.

The company announced the purchase of a small airline, which will be expensive, but will give control over the entire end-to-end process of transporting donor organs around the United States.

TransMedics has a clearly superior system, visible traction, will soon have the only US-wide organ transport network, and had 7% market share last year. Plenty of room to grow – and expand the market too.

Summary

At Jackson Hole last week, Powell finally admitted rates are in restrictive territory. The Wall Street Journal, which often explicitly telegraphs policy, ran with the headline ‘Despite what Powell says, the Fed is likely done’.

Inflation continues to roll over, and now job openings, which had perhaps an excessive impact on Fed policy, have been revised significantly lower. So the labor market – the remaining area of significant inflationary pressure – was not as strong as previously thought. Delinquency rates have started to rise and we are seeing consumer stocks start to roll over. We are focused on applying risk models to our high conviction positions, which already made some prescient exits.

Source: Wall Street Journal, US Labor Statistics

Meanwhile the winners of the AI boom are becoming increasingly clear, and they are familiar names indeed: Google, Microsoft, Nvidia, ASML, and Taiwan Semiconductor.

As consumer demand rolls over, we are also increasingly focused on fast growing medtech companies with substantial revenues growing at over 50%, and in some cases over 100%, like TransMedics. As we consider the highest returning companies over the next 1-3 years, the list is likely to include healthcare businesses that are several times the size, and of course, their underlying performance fortunately has little do with the economic cycle.

Best regards
Michael

Disclaimer

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