Management Commentary: July 2021
Dear Investors,
While the last several months in the markets were relatively tame, at least given the extreme moves over the previous year, most major indices were still near or at record highs exiting the quarter. Economic growth continues to accelerate as the reopening of most of the country is nearly complete. Interest rates have actually receded a bit since April as the Fed has been insistent that that they will not take action to withdraw liquidity until the end of 2022 at the earliest. However, with incipient inflation showing up in the economy and major fiscal spending plans still in the works, this could be overly optimistic. From the standpoint as investors, the biggest challenge is how to adjust to this post-COVID period. With growth normalization likely as we enter 2022, assuming any impact from any COVID variants remains relatively isolated, the best opportunities should be from those companies that can build on recent success, rather than those which simply had a surge in demand due to the broad lockdown of the last twelve months. We are likely to see a wider divergence between stocks and sectors as we move forward, and we intend to be even more selective with individual stock selection than usual. This is reflected in larger position weightings in our highest conviction names and smaller positions where there may be more uncertainty or valuation risk.
Jacob Internet Fund
The Jacob Internet Fund added two new positions in the quarter: Cloudflare and Galaxy Digital. Cloudflare is a leading networking company that acts as a single touchpoint for companies to manage their multiple cloud-based services by sitting in front of a wide variety of vendors. As the complexity of these multitudes of services increases, and security becomes more paramount, Cloudflare has already developed a strong reputation among small and large companies alike. Utilizing a freemium model, they have amassed over 4 million users with upgrades giving them close to 1,000 customers paying over $100k/year. Probably their most exciting offering today is Cloudflare Workers, a serverless, cloud-native platform that enables decentralized application development. Although Cloudflare trades at one of the richest valuations of companies we own, we believe that as Workers gains traction it could lead to a significant re-rating higher for the stock.
Galaxy Digital is a cryptocurrency-focused merchant bank, prime brokerage and advisory service firm founded in 2017 by Mike Novogratz, a multi-decade veteran of both Fortress and Goldman Sachs. By attracting top talent across the financial services industry, Galaxy is quickly becoming a leader in catering to institutions that need a trusted partner to help navigate the world of digital assets. Most recently, Galaxy has acquired one of the largest cryptocurrency custody specialists (BitGo), in order to round out its suite of offerings to investors. While Galaxy currently lists in Canada, the company has outlined its intention to trade on a U.S. exchange by the end of the year. With only a minuscule percentage of institutional assets currently in the crypto space, Galaxy Digital should benefit meaningfully as the allocation to this asset class rises over the next several years.
Jacob Small Cap Growth Fund
Besides Galaxy Digital, the Jacob Small Cap Growth Fund also added positions in Schrodinger and DermTech. Schrodinger was founded over 30 years ago as a physics-based software platform for use in drug discovery. Its computational approach to molecular simulation can save pharma/biotech companies significant research costs as well as shave many months or years of development. While all of the top 20 pharmaceutical companies are current customers, most of them are only utilizing the software for only a few programs, so the potential for increased usage is substantial. More recently, Schrodinger has entered into partnerships with smaller drug companies for equity stakes and has quickly established its own proprietary drug pipeline. This has the potential for a significant re-rating of the company’s valuation, and we believe this is not fully recognized in the current stock price.
Coming public as a SPAC in late 2019, DermTech offers a noninvasive sticker-based genomic testing product for melanoma cancer that can be used by dermatologists to assist in screening and eventually reduce the number of biopsies performed. Where a dermatologist today is likely to “follow” suspected lesions/moles, this will allow a quick, easy alternative to better determine if a specimen is likely cancerous. Already fully reimbursed by Medicare, DermTech has made significant progress in private insurance coverage over the last year. The next big step for the company will be obtaining approval for the far greater market of non-melanoma skin cancer analysis (~10m procedures annually) which should increase their addressable market considerably. Finally, for a smaller company, DermTech has an impressive management team with deep backgrounds from some of the largest healthcare companies in the world.
Jacob Discovery Fund *
The Jacob Discovery Fund added three new positions in the quarter, Comscore, BM Technologies as well as DermTech. Comscore has long been a market leader in measuring media viewership and advertising effectiveness. The company has a strong presence in many key areas of interest, including over-the-top and local television ratings as well as movie box office trends. The need for Comscore’s services has become much greater in recent months, as the technology industry’s changes to protect user privacy have made it much more challenging for content producers and their advertising customers to get accurate information about their audience. The company has had its share of financial and market challenges over the past few years, many of them self-created, but the company’s assets are substantial and tough to replicate. We believe the opportunity for Comscore accelerate their growth in revenue and cash flow is quite significant, an outcome which we think is not accounted for in the current valuation.
While still incredibly large, profitable and powerful, the traditional retail banking world is in a fair bit of trouble as younger people are inherently distrustful of the industry and increasingly looking for other solutions to meet their needs. Many companies such as SoFi, Dave, Prosper, Upstart, Ally are trying to disrupt the market, but BM Technologies is taking a somewhat unique approach to becoming a major fintech player in its own right. BM, which operates the BankMobile brand, has partnerships to provide financial aid disbursement to students at more than 700 universities around the country. By providing top-notch customer service and a broader array of banking services via a highly rated mobile app, BM hopes to convert those accounts into lifelong customers. In addition, the company has also recently been providing white-label banking services to other organizations with large customer relationships, such as T-Mobile and the soon-to-be-launched Google Plex program, and hopes to offer its technology for employees working at large enterprises. While we recognize that the COVID-related fiscal stimulus programs that have accelerated the company’s metrics will likely not continue, we believe BM is still in a good position to increase its two-million account total while remaining quite profitable. Its valuation, even assuming a dip in near-term growth rates, is also quite reasonable, especially when compared to other valuations in the neo-bank and fintech space.
Ryan Jacob
Portfolio Manager
Jacob Internet Fund
Jacob Small Cap Growth Fund
Darren Chervitz
Portfolio Manager
Jacob Discovery Fund
Mutual fund investing involves risk. Principal loss is possible. There are specific risks inherent in investing in the Internet area, particularly with respect to smaller capitalized companies and the high volatility of internet stocks. All three funds may invest in foreign securities, which involve greater volatility and political, economic and currency risks, and differences in accounting methods. These risks are greater in emerging markets. All three funds also invest in smaller companies, which involve additional risks, such as limited liquidity and greater volatility.
The Internet Fund may invest in fixed income and convertible securities. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. The market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. In addition, convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality.
Investments in micro capitalization companies may involve greater risks, as these companies tend to have limited product lines, markets and financial or managerial resources. Micro cap stocks often also have a more limited trading market, such that the Adviser may not be able to sell stocks at an optimal time or price. In addition, less frequently-traded securities may be subject to more abrupt price movements than securities of larger capitalized companies.
Click here to view the Jacob Funds prospectus.
*Effective 12/31/20 the Jacob Micro Cap Growth Fund was renamed as the Jacob Discovery Fund.
The information provided herein represents the opinion of Jacob Mutual Funds and is not intended to be a forecast of future events, a guarantee of future results, nor investment advice.
Click here to view the holdings for the Jacob Internet Fund, as of May 31, 2021.
Click here to view the holdings for the Jacob Small Cap Growth Fund, as of May 31, 2021.
Click here to view the holdings for the Jacob Discovery Fund, as of May 31, 2021.
Please note that these fund holdings are subject to change and should not be considered a recommendation to buy or sell any security.
Earnings growth is not representative of the Fund’s future performance.
The Jacob Funds are distributed by Quasar Distributors, LLC.