LTGG Reflections: Know where your towel is

Elevated volatility can present tantalising opportunities for long-term investors. As dislocations between fundamentals and share prices widen, our research flywheel must continue to spin.

What follows are some of the LTGG team’s “fantastically, wildly improbable ideas… at least worthy of consideration.”¹

Sticking with interplanetary travel, imagine telling the world’s space agencies that the next great leap in orbital launch would come not from Houston, Moscow, or Beijing but from a windswept peninsula in New Zealand. Rocket Lab’s rise was, by any conventional measure, fantastically improbable. Founded by Peter Beck – who, without a university degree or completing school, began tinkering with rocket-powered contraptions in his Invercargill workshop. By 2017, Rocket Lab became the first private entity in the Southern Hemisphere to reach space. It has since established itself as a global leader in launch services and space systems, now competing for multi-billion-dollar defence contracts.

Its Electron rocket, which hosts a 3D-printed engine, has achieved a launch cadence that outpaces much larger rivals and boasts a 94% launch success rate. The company’s vertical integration gives it the agility to pivot, scale, and seize new opportunities as the space economy explodes.

“Launch” is only one-third of the company’s current revenues, with the remainder coming from “Space Systems,” the segment through which Rocket Lab designs, manufactures, and operates space crafts and satellites on behalf of customers. With its components having featured in approximately 1700 missions since inception and a backlog of around $1 billion, it is clear that Rocket Lab is emerging as a trusted partner with government and commercial entities alike.

There is certainly plenty to go after for those brave enough to attempt laying the foundations of space infrastructure, but not without technological or capital risk. Rocket Lab remains a company we are following with interest from afar, as we continue to calibrate the risk-reward on offer.

18,404km (as the crow flies) from Auckland, you find yourself in Maranello – the beating heart of the Italian Motor Valley – where the prancing horse is charging into uncharted terrain. Roaring Ferraris have echoed through the town’s test track for over 80 years – in a symphony of combustion, legacy, and unapologetic luxury.

Founded in the midst of World War I, Ferrari’s journey is a masterclass in balancing tradition and transformation. Its latest challenge: blend the brand’s signature performance, emotion and unmistakable sound with cutting-edge electric propulsion. This leap isn’t just about compliance or trend-chasing; it is a commitment to innovation. Ferrari is channelling 35% of its investments into electric vehicles and 40% into hybrids, aiming to achieve carbon neutrality by 2030. Underpinning this is “Ferrari’s Law,” a stretching ambition to improve battery density by 10% every year.

The Ferrari Elettrica will set aficionados back €500,000. If successful, it will join the Purosangue (Ferrari’s first SUV, launched in 2023) as proof that products that might have once been considered sacrilegious can very lucratively capture the imagination of the Ferraristi.

Scarcity, heritage, and unparalleled sense of community make Ferrari a unique asset. However, the market recognises that this is one of the best brands in the world, so its luxurious valuation remains a sticking point.

Our latest LTGG new buy, Reddit, serves as a case study of the power (and monetisation potential) of community. Started in 2005 by two college roommates with the ambition to build the “front page of the internet,” Reddit has grown to become one of a handful of social media platforms boasting over a billion monthly active users – a long way from the days when co-founders Steve Huffman and Alexis Ohanian would create fake user accounts to seed content and stimulate engagement.

Its success to date is even more impressive when you consider Huffman’s own reflections that this was “a badly run company for most of its history,” with the platform and user proposition having been largely neglected. To this day, he attributes Reddit’s survival and subsequent revival to content being organised by community groups instead of hashtags. So, while Reddit may be 20 years old, we believe it is still early in its s-curve.

We don’t think it's wildly improbable for Reddit to more than double its user base over the next five years. New features, improvements in search functionality, and international expansion are part of the strategy. The latter is accelerating thanks to generative AI translation, which can now bring together individuals with shared interests from across the globe.

In addition to the increasing number of users, there is the potential for the revenue attached to each user to grow substantially. Monetisation levers include advertising – which is expanding from a low base, paywalled subreddits, and premium subscriptions. We also expect user-generated content will become even more valuable in a world awash with AI and Reddit’s nascent data licensing business is signal that demand for authentic content exists.

As revenues increase, operating leverage could expand operating margins up to 40%, comfortably allowing for a quintupling in the shares. We were awarded an attractive entry point after the shares halved from their peak due to a severe bout of short-term fever. Reddit acts as a clear example of the opportunities that long-term, active stock pickers can capitalise on in this environment.

So just as Arthur Dent’s towel in Hitchhiker’s was a source of comfort and utility amid cosmic chaos, our conviction in long-term growth – and in the companies driving it – anchors us through market storms. We believe that by staying invested, looking through the noise, and embracing innovation from unexpected places, we give ourselves the best chance of capturing the next generation of outlier returns.

So, as the Guide would say: Don’t panic. Know where your towel is. And keep looking for great ideas – wherever they may appear.

[1] Douglas Adams. The Long Dark Tea-Time of the Soul. Stoddart, 1988. p. 124.

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