“We’ve looked at the valuation across the top 10 enterprise software companies in the world and they’re trading on 21 times free cashflow. Our stocks on average are below that, they’re even cheaper and we’re taking the best out of the group.”
While newer companies such as Dropbox could offer a single service like cloud storage, the scale of a company like Microsoft meant it could offer the same service within its broader product suite, as it did with cloud storage service OneDrive, a situation Mr Mitchell believes investors should be wary of.
“Does Dropbox really have a purpose if you can use OneDrive in the cloud with Microsoft?” he said. “Can it survive and can they actually charge for that when effectively it’s being given away for free by Microsoft?”
The scale of investment in research and development by the larger companies also means they will continue to innovate, pushing smaller players out of the market, he said.
“The R&D of incumbent platforms is almost double the sales of the disruptors,” Mr Mitchell said.
“The big companies are rumbling past. They’re taking six times as much revenue as disruptors and, while some of these disruptors are growing fast, they may hit the wall when one of the platforms decides to seriously compete in the segment they’re in.”
Mr Mitchell said disruptors also had the potential to push each other out of the market, citing the increasing saturation of the ride-share and taxi market as an example.
“You see all of these Uber copycats, but we don’t think any of these companies will survive,” he said. “Really, I think it will come down to Uber plus maybe one other, potentially a duopoly. But it’s going to be a bitter fight to the death.”
His inclination towards larger players is also seen in his wider sector preferences, believing globally focused stocks are a stronger investment than US companies with a more domestic focus.
“It’s not because we are fundamentally biased against the US. We think some of the best companies in the world exist in that market and we’d like to buy them when they get cheap,” he said.
“The problem is, the US domestics have had tailwinds. Arguably it’s as good as it gets and you are starting to see fairly broad cost pressures. We think the worst is to come in the US domestic stocks.”
Mr Mitchell said the incumbent multinationals were making trading conditions tough for the locally focused businesses.
“The companies leading the disruption are Amazon and Microsoft, these big multinationals. There’s significant, competitive pressures building.
“If you found a strong incumbent retailer that had an answer to Amazon, Antipodes would have no problem buying it. We think Walmart is in a very strong position to compete with Amazon, but they’re the exception.”