Alkeon Capital Management’s Stock Holdings And Investment Approach

Updated on September 23rd, 2020 by Aristofanis Papadatos

Alkeon Capital Management is a privately owned registered investment adviser out of New York. The company was formed in 2002 as a spin-off from CIBC Oppenheimer.

Two key persons govern the firm, Takis Sparaggis, President and CIO, and Alex Tahsili, who performs the Managing Director role. They both oversee Alkeon Capital Management’s portfolio, which is valued at approximately $39.5 billion.

Investors following the company’s 13F filings over the last 3 years (from mid-May 2017 through mid-May 2020) would have generated excellent annualized total returns of 18.5%. For comparison, the S&P 500 ETF (SPY) generated annualized total returns of 7.9% over the same time period.

Note:  13F filing performance is different than fund performance.  See how we calculate 13F filing performance here.

You can download an Excel spreadsheet with metrics that matter of Alkeon Capital Management’s current 13F equity holdings below:
 

Keep reading this article to learn more about Alkeon Capital Management.

Table Of Contents

Alkeon’s Approach To Investing

Alkeon has stayed away from the spotlight for decades, publishing limited information regarding its operations and investment philosophy. An interview with management from its early days, however, reveals essential info, which according to today’s holdings, seems to hold to the present.

Its research process is a 100% bottom-up, fundamentally-driven, research-concentrated procedure to investing. Their flagship strategy involves identifying significant potential returns in Technology, Media, Telecom (“TMT”) in the broadest of scope. Applying a bottom-up strategy implies that Alkeon focuses on individual securities rather than on the overall movements in the securities market.

Mr. Sparaggis, who holds the final word for any investment, aims for a 12 to 24-month time horizon for Alkeon’s holdings and discourages short-term trading. Alkeon avoids timing the direction of the market and aims to generate alpha based on its exceptional stock-picking skills. It also has an elaborate network of industry contacts, with whom it is in continuous talks in order to identify industry trends before they become apparent to Wall Street.

Alkeon is primarily focused on investing in stocks with impressive growth rates. Most investors hesitate to invest in this type of stocks due to their excessive price-to-earnings ratios but Alkeon has proved competent in identifying high-growth stocks whose growth more than offsets their high earnings multiple and thus offer outsized returns. Notably the average price-to-earnings ratio of the stock portfolio of Alkeon currently stands at 59.6.

In terms of risk management, the company’s in-house risk manager is responsible for periodic checks to ensure diversification among individual securities and sectors, liquidity, and overall fund exposures.

Finally, Alkeon manages its clients on a pari passu basis. In other words, clients are treated on an equal-footing manner, managed without preference. In comparison, some hedge funds may differentiate among multiple classes of clients, based on their available capital and reputation.

Alkeon’s Top Holdings

Around half of Alkeon’s portfolio consists of public equities, while the rest embodies several different security types, as hedge funds do to alleviate their risk profile. The company’s picks reflect management’s tech and media-oriented strategy. These two sectors occupy 46.6% and 12.53% of its portfolio, respectively.

Out of Alkeon’s 124 individual stocks, the top 5 holdings account for 22% of its public-equities part of the portfolio while the top 20 holdings account for 51% of the portfolio. These figures indicate a somewhat diversified allocation of funds, but investors should realize that the actual diversification is much lower due to the almost exclusive focus of Alkeon on the tech and media sectors.

As of the company’s latest F13 filing, the following are the top 10 holdings of Alkeon.

Amazon (AMZN)

Amazon is the largest holding of Alkeon’s portfolio, comprising 5.9% of its total value. The online giant has vastly outperformed the S&P 500 over the last three years (209% vs. 33%) and thus it has been a major contributor to the aforementioned out-performance of Alkeon versus the broader market.

Amazon benefits from a strong secular trend, namely the continuous shift of consumers from conventional shopping to online shopping. As physical stores carry much higher operating expenses than Amazon, they cannot match its prices and thus the online giant enjoys a wide moat, particularly given its enormous economies of scale.

Amazon has grown its revenues and its earnings per share nearly 10-fold over the last decade. Even better, the secular shift from brick-and-mortar retail to online shopping has accelerated this year thanks to the pandemic. In the second quarter, Amazon grew its revenue by 40% and doubled its earnings over the prior year’s quarter. While the company incurred $4 billion of costs related to the pandemic, primarily for the safety and the compensation of its employees for their health risk, it tripled its online grocery stores and thus achieved record earnings.

While the pandemic is likely to subside from next year, the consumers who have recently shifted from conventional to online purchases are likely to adopt online shopping for the long run thanks to its advantages. This helps explain the 60% rally of Amazon stock this year.

RingCentral (RNG)

RingCentral is the second-largest holding of the portfolio of Alkeon, comprising 4.8% of its total value. The company offers software solutions that enable businesses to communicate and connect. Its products include RingCentral Office, which facilitates communication across various modes, including high-definition voice, video, SMS and conferencing.

RingCentral has greatly benefited from the coronavirus crisis, which has led numerous companies to adopt a work-from-anywhere model. Companies now require communications solutions in which the employees can work efficiently with their colleagues and their customers from anywhere. RingCentral initiated cloud migration of business communications more than a decade ago and hence it is now ideally positioned to benefit from the transformation of the business landscape which has been caused by the pandemic.

RingCentral has grown its revenue every single year in the last decade, with a greater than 10-fold increase over this period. It has also exceeded the analysts’ earnings-per-share estimates for 20 consecutive quarters. The stock has rallied 53% this year and more than 6-fold in the last three years.

Even better, the company still has ample room to grow further. This was clear in the latest quarter, in which RingCentral enjoyed double-digit growth in messaging and triple-digit growth in video and mobile voice minutes on its Message Video Platform and thus grew its revenue 33% over the prior year’s quarter.

MecradoLibre (MELI)

MercadoLibre was founded in Argentina in 1999 and operates online commercial platforms in Latin America. Its product Marketplace is an automated online commercial platform, which enables companies and individuals to list their merchandize and execute sales and purchases online.

Just like Amazon, MercadoLibre greatly benefits from the secular shift of consumers from brick-and-mortar retail to online shopping. This trend has accelerated this year thanks to the pandemic, which has forced numerous consumers to resort to online shopping in order to avoid the health risk associated with the physical stores.

The total online purchases in Latin America have grown at an approximate 19% average annual rate since 2015. In addition, they comprise a much lower portion (3%) of the total retail purchases than the online purchases in the U.S. (12%) and thus there is huge future growth potential, particularly given the tailwind from the pandemic.

On the other hand, many countries in Latin America, such as Brazil, have been severely affected by the high propagation rate of the coronavirus. As a result, they are poised to incur a harsh recession and MercadoLibre will post just a marginal profit this year. Nevertheless, as soon as the pandemic subsides, MercadoLibre is likely to grow its earnings at an exceptional pace thanks to the strong underlying trend that supports its business.

Facebook (FB)

Facebook is an unparalleled social media company. It has grown its earnings every single year in the last six years and has grown its earnings per share more than 10-fold throughout this period. It has achieved this enviable performance thanks to the continuously improving monetization of its popular platform.

Facebook is currently enjoying excellent financials, with $65.7 billion of cash and receivables, and a net cash position of $35.5 billion (5% of the market capitalization of the stock). Facebook is one of the extremely few companies that have no debt. This is a testament to the strength of its business model and its perfect execution. Moreover, even though half of the globe uses at least one of the apps of Facebook on a monthly basis, its user base is still growing at double-digit rates.

Notably Facebook has exceeded the analysts’ earnings-per-share estimates in 19 of the last 20 quarters. Even better, the company still has ample room for future growth and is expected to keep growing its bottom line at a double-digit rate for many more years. Thanks to its recent 17% correction, its price-to-earnings ratio has decreased to 31.5. While this valuation level is too rich for most stocks, it is not extreme for a high-growth stock like Facebook. The stock is likely to keep rewarding its shareholders generously for many more years.

Microsoft (MSFT)

The diversified portfolio of tech products and services of Microsoft has been ruling the sector’s digital infrastructure. The company’s CEO Satya Nadella has been marvelously transforming the company into a cloud powerhouse. As a result, while the company was considered mature until a few years ago, it has managed to accelerate its growth and post all-time high earnings in the last two years.

On the one hand, it is impressive that a stock with a market capitalization of $1.7 trillion, the second-largest in the stock market, still has strong growth momentum. On the other hand, we are concerned over the remarkably high price-to-earnings ratio (31.1) of this large-cap stock. Microsoft is likely to keep growing its earnings in the upcoming years but its rich valuation renders it vulnerable in the event of an unexpected headwind. It is remarkable that the stock is trading at 18.1 times its expected earnings in 2025, thus revealing that the market has already priced a great portion of future growth in the stock.

Alphabet (GOOG)

Alphabet offers several well-known products, such as Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, YouTube, as well as technical infrastructure.

While it has been extremely popular for more than a decade, it is still a high-growth stock. Alphabet has more than tripled its earnings per share over the last nine years. It also has a net cash position of $71.5 billion (7% of the current market cap of the stock). The huge net cash position is a testament to the strength of the business model of Alphabet and its unparalleled business execution.

Alphabet is supposed to benefit from the pandemic, which has forced people to spend much more time at home and thus more time on their computers. However, Amazon posted a 1.5% decrease in its revenue in the second quarter and is poised to incur an approximate 15% decrease in its earnings per share this year. The company has not provided a reason for the lackluster performance this year but the reason is most likely the severe recession caused by the pandemic worldwide.

On the bright side, the pandemic is likely to subside from next year thanks to the expected development of a vaccine. As a result, Alphabet is likely to return to its multi-year growth trajectory next year.

Cadence Design Systems (CDNS)

Cadence Design Systems provides software, hardware, services and reusable integrated circuit design blocks worldwide.

The company benefits from some generational growth drivers, such as 5G, artificial intelligence and hyper-scale computing. Thanks to these growth drivers, Cadence Design Systems enjoys strong growth in the demand for its relevant software and hardware solutions as well as its Intelligent System Design.

It is thus not surprising that the company has nearly tripled its earnings per share in the last two years. It is also admirable that the company has not missed the analysts’ earnings-per-share estimates for 20 consecutive quarters. This impressive performance helps explain the fact that the stock has more than doubled in the last two years.

On the other hand, growth is likely to somewhat moderate from next year due to the gradual exhaustion of the tailwind from the above growth drivers. In addition, despite its recent 15% correction along with the entire tech sector, the stock is still trading at a forward price-to-earnings ratio of 39.2, which reflects a markedly rich valuation level. Given also the volatile performance record of the company before 2018, we believe that the stock has an elevated amount of risk around its current price.

Coupa Software (COUP)

Coupa Software offers a cloud-based comprehensive business spend management platform that can be adjusted to virtually every company in the world. This platform enables its customers to optimize their capital spending and reduce their expenses and thus become more competitive in the current business environment, in which competition has heated more than ever.

As Coupa Software is in the first stages of its growth trajectory and its platform is suitable for numerous companies worldwide, the growth potential of the company is immense. On the other hand, investors should note that Coupa Software is expected to post the first profit in its history only this year. Moreover, the stock is trading at 86 times its expected earnings in 2025.

If the company executes its growth strategy perfectly for a whole decade and it is not affected by potential competitors, its high growth rate will almost certainly offset the rich valuation of the stock. On the other hand, the stock will have significant downside risk whenever it faces a downturn.

Coupa Software currently enjoys strong business momentum, with no hurdles on the horizon. The company has nearly $2 trillion of other companies’ revenues under management and delivered record revenues of $126 million in the second quarter, despite the headwind from the pandemic. It also exceeded $100 million in free cash flows in the last 12 months for the first time in its history. Moreover, the company has exceeded the analysts’ consensus on both revenues and earnings for 20 consecutive quarters.

Overall, Coupa Software has exciting growth prospects ahead and enjoys impressive business momentum but its stock has a remarkably rich valuation. The 30% correction of the stock in less than three weeks in September is a harsh reminder of the downside risk of the stock in the event of business deterioration or a broad market correction.

Synopsis (SNPS)

Synopsis offers electronic design automation software products that are used to design and test integrated circuits.

The company benefits from a series of major growth drivers, such as artificial intelligence, 5G, high-performance computing, cloud and the proliferation of Smart Everything. Thanks to the booming demand for all the products of Synopsis that are related to the above growth drivers and the relentless complexity of chip and system design under both fabless and vertically integrated strategies, the company is enjoying strong business momentum. Despite the severe recession caused by the pandemic, Synopsis is on track to grow its earnings per share by about 20% this year.

Even better, it is expected to keep growing its earnings per share at a double-digit rate in the upcoming years thanks to its reliable revenue growth and margin expansion. It is also impressive that the company has not missed the analysts’ consensus on both revenues and earnings for 18 consecutive quarters.

On the other hand, investors should be aware of the rich valuation of Synopsis, as the stock is trading at approximately 25 times its expected earnings in 2023. The rich valuation renders the stock vulnerable in the event of a downturn or a broad market correction.

Shopify (SHOP)

Shopify provides a cloud-based commerce platform, which enables merchants to adapt to the e-commerce era. The company obviously benefits from a secular trend, which has decades ahead to run, namely the shift of consumers from brick-and-mortar purchases to online purchases.

The pandemic has caused this long-term trend to accelerate at an enormous pace. As a result, Shopify saw its revenues double in the second quarter over last year. That was the steepest revenue growth recorded in more than five years.

Shopify has grown its monthly recurring revenue at a 46% average annual rate over the last five years. Even better, thanks to the immense growth potential of its business, it is likely to keep growing its revenues and its earnings at a breathtaking pace for several more years.

On the other hand, the market has already priced a great portion of future growth in the stock price. To provide a perspective, the stock has rallied 177% in the last 12 months and thus it is currently trading at 37.2 times its expected earnings in 2025. As a result, the stock will have material downside risk whenever it faces an unexpected headwind.

Final Thoughts

Alkeon Capital Management passes under the radar of the vast majority of investors. This is a shame, as Alkeon has outperformed the S&P 500 by a wide margin in recent years. On the other hand, the investors who will attempt to match its returns by purchasing some of its stocks should be aware that most of these stocks belong to the tech sector, which is characterized by sky-high valuation levels due to the breathtaking rally of the sector in the last few years. As a result, these stocks carry an elevated amount of downside risk.

You can download an Excel spreadsheet with metrics that matter of Alkeon Capital Management current 13F equity holdings below: