Having been slightly preoccupied with oil markets gyrating into the abyss, we’d meant to pen a short note on this announcement from TPG, a stock we own in our direct equity portfolios.

The basic premise is that the new 5G technological capabilities are surprising to the upside, leading to the establishment of a new world record.

That’s good.

Our investment thesis is a handful of ideas, all related (endogenous).

One, TPG is a high quality company. Quality companies, as a style, as an investment strategy, tend to beat the benchmark over long periods of time, generating alpha. There are behavioural reasons, and risk premia related reasons for why this is so, but suffice it to say that TPG is a contributor to our overall portfolio Quality factor loading.

Two, the “G” rollout cycles, (3G, 4G, and now 5G) have been associated with strong ARPU growth (average revenue per user), and that is a meaningful driver for industry profitability.

Three, the industry has consolidated, with TPG and Vodafone getting together, which should give idiosyncratic drivers to the stock (revenue and opex synergies from cross-sell, harmonisation of procurement) as well as industry wide ones (arguably less competitive tension, given the prioritisation of returns, after many years of aggressive pricing).

Four, the market share argument. Whilst the world record above is an unambiguous positive, by and large there is modest differentiation across product, offering, service (not none, but the gap narrows year by year). With Telstra the enormous incumbent, there is an opportunity (but of course no guarantee) that TPG can nibble away at share, and thus grow a little quicker than the market expects (which leads to outperformance).

There are more arguments, but they get progressively weaker. The flip side of all this is that incumbents are very difficult to dislodge, most of the time they maintain their “moat”, customers prove sticker than expected, and so you don’t want to overpay for the idea.

We think TPG is cheap, that we aren’t overpaying, and as such are compensated for that risk. Of course, everyone implicitly thinks that, but, it helps to lay out ones thinking.

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Please note that past performance is not a reliable indicator of future performance.

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