Don’t judge each day by the harvest you reap but by the seeds that you plant. –Robert Louis Stevenson

The Fund’s largest detractor from performance in September was Shutterfly, Inc. (“SFLY”) equity. The Company operates an ecommerce site offering a wide range of photo-related products and services for social expression and personal publishing. On September 20th, Amazon released Amazon Prints, a service for Amazon users to print photos and photo books directly from Amazon Photos at competitive prices. SFLY shares traded down over -12% that day. Amazon’s photo offering is “white label”, processed by Snapfish, a smaller SFLY look-a-like. Amazon cannot make money with a white-labeled product which we understand, may be simply about driving higher Amazon Cloud usage. If Amazon really wants to be in the photos business, owning production and customer content (hence, Cloud expanding) would make more sense. SFLY presently has significant advantages in flexibility, product offering and customization. More importantly, Amazon is not offering any holiday-centric products presently as we near year-end and SFLY’s most meaningful 4Q16 (over 50% of revenues) period. The Fund owns SFLY based upon valuation and particular “A” Actor’s Assessment circumstances. The highly regarded ex-Amazon UK Chief Executive, Chris North, joined the firm as CEO during 2Q16. Some have questioned if this hire signals a decision to remain independent (our plausible catalyst is an acquisition), however, we have reviewed specific language that related to North’s compensation, which to us, suggests a meaningful payout to him should SFLY be acquired. The question we must answer is what are Amazon’s intentions? Do they intend to crush all comers (including SFLY) or is this a prelude to acquisition? Amazon does have a history of making acquisitions in areas of interest that grow slowly (buying Zappos in 2009 when their own shoe business was slow to gain traction). Further, is a prospective acquisition enhanced or hampered by the SFLY CEO being a one-time Amazon executive? CEO North and Amazon’s Jeff Bezos, we have on information and belief, are personally friendly. An acquisition of SFLY by Amazon kills three birds with one stone: 1) makes Amazon Photos profitable, 2) drives large growth in Amazon Cloud with the migration of SFLY customer content, and 3) brings Christopher North back into the Amazon fold. Of course others may care as well. The Company can support Leveraged Buyout (LBO) debt (we believe that SFLY has been solicited by a private equity firm), and others may see strategic logic in a combination.

The Fund’s equity position in PayPal Holdings, Inc. (“PYPL”) was the largest contributor to performance in September. It was a busy month for PYPL. The Company announced deals with MasterCard early on, and then Visa. While the presumption was that this expands PYPL’s access, use and transactions volumes, many assumed it would likely be dilutive to Earnings Per Share. At a banking conference, the Company’s CFO said “people shouldn’t assume PayPal’s deals with Visa and Mastercard are automatically dilutive to 2017 earnings.” We believe that PYPL is at the epicenter of the migration of transactions online, increasingly mobile and industry consolidation. The Company believes that it will process $100bn in mobile payments in the next 12 months. Further, that customer demographics favor PYPL, making them an attractive acquisition candidate to those in digital commerce.

PayPal Two-Sided Network


The above post has been excerpted from a letter of Tiburon Capital Management.


Watch Peter Lupoff discuss the influence of Marty Whitman:

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