Dear Clients,

After a strong 2024 for financial markets, the start of 2025 has been marked with a high degree of investor uncertainty and market volatility. While the current headlines make for attention-grabbing reading, we are far more focused on compounding your capital over long periods of time. Thankfully, after another productive year in 2024, we have continued our track record of delivering greater than 25% p.a. for 5 years, 10 years and since our inception in 2005. As TDM now enters its 20th lap of the sun as a fund, $1 invested in TDM in 2005 is now worth more than $85. We are immensely proud of this and grateful for the support you have all shown us throughout the years, both through the ups and the downs. Without this, none of it would have been possible.

As you all know by now, our approach at TDM is to invest in a highly concentrated portfolio of 10–15 high growth businesses globally and hold these for the long-term. We spend almost all our time thinking about these businesses and very little time thinking about the broader market. We are business prognosticators, not market prognosticators.

However, this does not mean the market is irrelevant to us. Rather, we subscribe to the Benjamin Graham view of the world that “the market is there to serve you, not to guide you.”¹

The question then becomes, “how can the market best serve us today”? To answer this, we like to keep an eye on market developments and use this to inform whether we should be actively deploying your capital or rather being more defensive and sitting on the sidelines. Of course we are never truly on the sidelines, as we spend the vast majority of our time and energy managing the current portfolio of public and private positions.

That question is the purpose of our market memos. We do not write one every year, rather only when we have something we think is worth saying. In 2021 we thought the market for growth companies was excessively overvalued. In both 2022 and 2023, we argued that valuations had come back to earth and that it was a good time to be selectively deploying capital. We did not publish anything in 2024.

Today, we return with the 2025 TDM Market Memo to explain our current thinking. To summarise this in one-line; we believe markets are neither excessively over valued nor under valued. Rather, we think we are in a stock picker’s market, where business selection matters more than ever.

We always are asking ourselves, “is this a time to play offense or defense with your capital”? Today, we are tipping the balance toward offense. This means we are actively deploying capital into attractive opportunities while ensuring we have some cash in the portfolio so that we can “punch our card” when the opportunity presents itself.

As always, if you have any questions, please feel free to contact me at any time.

Yours in investing,

Andy

Looking backward – party like it’s 1999

2024 was a strong year for the US equity markets. The S&P500 was +23% while the Nasdaq Composite was +29%. Recent market volatility notwithstanding, both indices are now above the prior peaks set in late 2021 / early 2022 and considerably so; the S&P500 by 18% and the Nasdaq by 11%. This recovery is significantly faster than prior downturns.

The S&P500 has now delivered two consecutive years of greater than 20% returns. The last time this happened was 1997 and 1998. To contextualise history, Titanic had just won an Academy Award for Best Picture, the Spice Girls were topping the music charts and Tiger Woods had just won his first Major. The Nasdaq Composite has performed even better, with its 29% return in 2024 following a 43% gain in 2023.² These are exceptional returns.

The past few weeks have been challenging for markets. The S&P500 and Nasdaq are down 8% and 12% respectively from their recent peaks. While this certainly feels painful in the moment, the story is different when viewed from a multi-year lens. We are not saying things won’t get worse, as the truth is, we don’t know. What we do know is that these past few weeks are currently just a blip in an otherwise strong market.

This strong performance has prompted many market pundits to claim that markets are overvalued and that forward returns are likely to be lower. Indeed, on a forward revenue multiple basis, both the S&P500 and the Nasdaq Composite are trading roughly in-line with the peak levels in late 2021/early 2022.

Exhibit 1: Broad market index EV / NTM Revenue (January 2019 to today)

We think this is an interesting starting point in our evaluation of the market but insufficient on its own. As investors in high-growth companies, we are most interested in the performance and fundamentals of these businesses, not broader indices.

How have growth companies performed over the same period?

In our 2023 memo, we showed the performance of the Bessemer Venture Partners (BVP) Cloud Index³, our favoured index of high-growth software businesses, against the S&P500 and the Nasdaq Composite indices from January 2019 to February 2023 (the time of releasing the memo). This is reprinted below:

Exhibit 2: Index performance (January 2019 to February 2023)

Importantly, this was our commentary at the time:

The biggest takeaway is that the highest growth businesses peaked earlier and have fallen substantially more than the broader market: The BVP Cloud Index has fallen 65% compared to 16% and 26% respectively for the S&P 500 and Nasdaq Composite. While the magnitude of the decline is stark, it is not surprising that these businesses are more volatile than the market. They are typically earlier stage, growing at higher rates and trade at higher multiples, making them more susceptible to shifts in sentiment.

The memo also noted, with reference to the experiences during the Dot Com crash in 2000 and the Global Financial Crisis in 2008, that during extreme market routs, growth companies tend to fall harder and faster than broader indices but also bounce back earlier and quicker.

Did the 2022 ‘crash’ follow a similar pattern? We have updated the data to help answer this:

Exhibit 3: Index performance (January 2019 to today)

The BVP Index has indeed recovered, up 47% from its lows in November 2022. While interesting on an absolute basis, a relative comparison to the broader market indices provides more insight. The BVP remains close to 50% below its 2021 peaks, a stark contrast to both the S&P500 and the Nasdaq Composite which are both well above prior peaks.

We think there are two explanations for this:

1. We argued in our 2021 memo that the starting point for high growth companies at the market peak was one of significant overvaluation. While the recovery from the lows has been strong, the prior peaks were so lofty that it will likely take some time for this to be exceeded.
2. There is significant market concentration in the broad market indices. The S&P500 consists of the 500 largest public US businesses.⁴ However, the top eight companies⁵ (endearingly labelled the ‘Fateful Eight’) now account for an incredible 32% of the market capitalisation of the index. This is up from 21% at the start of 2023. Likewise, these same eight companies account for almost 60% of the Nasdaq Composite today, up from 40% at the beginning of 2023. As both indices are weighted by market capitalisation, these eight companies not only have an outsized influence on these broad market indices, they essentially are the broad market indices.

Never in modern history has such a small number of companies had such a pronounced impact on the market. In fact, the last time equity markets were anywhere close to current concentration levels was 1999 – right before the Dot Com crash.

For analysis sake and to visualise the outsized impact these eight companies have, below is the BVP index compared to the S&P500 excluding the Fateful Eight. We call this the S&P492.⁶

Exhibit 4: Index performance excluding the Fateful 8 (January 2019 to today)

There are a few key observations about the S&P492:

• It increased a more modest 11% in 2023 and 13% in 2024.
• It’s peak-to-trough drawdown was c.22%, slightly better than the S&P500 of c.25%.
• It has recovered but not to the same extent as the S&P500 – it is 10% above its January 2022 peak compared to the S&P500’s 18%.

Relative to the S&P492, the recovery in the BVP index looks stronger, albeit the BVP index remains well-below its peak levels. The recovery to reach prior peaks for growth companies has been slower than the broader indices. From this perspective, history has not repeated itself.

However, the one final thing we will say on this, and something we believe is critically important; if you were to have invested in the (equal weighted) BVP index at the start of January 2019 (the beginning of the measurement period), you are now better off than if you had invested that dollar in any other broader index – currently albeit it only very marginally. Exhibit 3 which shows the green BVP line ever so slightly above the Nasdaq, and both well above the S&P500.

The key takeaway: despite significant volatility, it pays to hold the best growth businesses over the long-term.

Looking forward – the return of the stock pickers

For this memo we thought it appropriate to extend our analysis. Rather than use the BVP Index as our proxy for growth companies, we have included every US-listed software business we could find above US$100m market capitalisation – a total of 200 businesses – into what we call the “TDM Software Index” (we are investors after all, not creatives!). We think this broader representation of US growth public companies is a better proxy for our analysis.

The characteristics of the TDM Software Index are outlined below.

Exhibit 5: Summary characteristics of the TDM Software Index ⁷

The median business in this index is expected to generate over $800m of revenue this year, growing low double digits, and produce EBITDA margins in excess of 20%. These are real businesses with real growth and earnings.

Below is the long-term valuation of the TDM Software Index. The index trades at an average of approximately 9x NTM revenue today. This compares to a 10-year average of approximately 7x NTM revenue. However, the median business in this index is trading at less than 5x NTM revenue today, below the 10-year average of 5.6x. Excluding a brief period during the 2021 bubble, there has never been such a wide valuation divergence between the average and the median growth software business.

Exhibit 6: EV / NTM revenue multiple for the TDM Software Index

Why is this so?

Put simply, a small number of outliers are pulling up the average, while the majority of businesses are trading at much more reasonable valuations.

To illustrate this clearly, below is the average valuation for the top 20 businesses in the TDM Software Index by market capitalisation.⁸ These 20 businesses are trading at over 13x NTM revenue today – representing a substantial premium to the index and not too far below the peak levels in 2021!

Exhibit 7: EV / NTM revenue multiple for the Top 20 businesses in the TDM Software Index

As we know, valuation is not a standalone concept. Fundamentals matter. Perhaps these 20 highly valued businesses have the fundamentals to support their higher valuation?

Exhibit 8: Top 20 largest businesses in the TDM Software Index

Unsurprisingly, these businesses are substantially bigger, growing faster and more profitable than the median business. While this is impressive and likely explains part of the valuation gap, the divergence is too extreme relative to the fundamentals.

We will reserve judgment on whether the top 20 businesses in the index are overvalued. Rather, our focus is on the remaining 180 businesses that appear to be far more attractively priced. As noted above, these businesses are trading below their 10-year averages – hardly indicative of excessive valuation.

It would be totally remiss of us not to mention the threat (and opportunity) that the recent and rapid AI developments hold for this cohort of companies, and the flow through that this technology shift could have on their durable growth rates and enterprise value. We lack a crystal ball. But one thing is clear to us: there will be winners and there will be losers. What is less clear at present is who they will be and the valuation implications of being in each of these buckets.

As Warren Buffett has often repeated, investing is simple but not easy. This is always the case. However the job of an investor becomes even harder when in the middle of a generational technology shift that considerably impacts long term competitive advantage. During periods of rapid change we prefer to ask ourselves what won’t change rather than try to predict what will. We take some comfort in the fact that foundational investing principles such as always buying with a margin of safety and prioritising opportunities with asymmetric expected risk-return outcomes remain intact. 

We will need to take a view on this specifically as long-term investors. But given that we are only in the early innings, we feel more comfortable for the moment reserving ultimate judgment. Rest assured that we are thinking about the impact AI is having on our current portfolio companies, and our future ones, every single day.

Bringing this all together

The following is apparent to us today:

1. The S&P500 and Nasdaq are trading close to peak levels. But these are heavily influenced by a small number of the world’s largest businesses and are therefore not a good measure of broader valuations;
2. Growth companies appear expensive relative to long-term averages. However, this is also skewed by a small number of the largest businesses in this group;
3. The median US-listed software business is currently trading below long-term averages at <5x NTM revenue. There is no indication of overvaluation for this group.

Putting this all together neatly, we think there is plenty of opportunity for growth-oriented investors today – one just needs to look beyond the biggest businesses. But just because most businesses appear reasonably valued today does not mean that most businesses represent good investment opportunities. Good investment opportunities are hard to find and require diligent stock selection based on long-term business fundamentals.

We merely believe that the conditions are as good as any for the patient investor willing to do the work. We call this a “stock picker’s market”. Recent market volatility only makes it more likely that the market will throw out interesting opportunities for us to examine more closely.

For TDM, this is very much business-as-usual. We are actively looking to deploy capital in attractive investment opportunities (which for us typically means >25% p.a. expected returns) but are also comfortable holding some cash.

That’s all for this memo. Now if you’ll excuse us, we’ve got 180 reasonably priced businesses to go through.

Footnotes

1. Benjamin Graham, The Intelligent Investor – The Definitive Book on Value Investing. ↩︎
2. The Nasdaq Composite has historically had more price volatility than the S&P 500 due to its larger and broader base of constituents, with smaller, growth oriented businesses. ↩︎
3. We calculate our own index using the average daily share price performance for the latest BVP constituent list as found on https://cloudindex.bvp.com/companies. Due to constituent changes in the BVP Index over time, there are minor differences between this chart and the chart shown in the 2023 memo. Also index levels may not perfectly correlate to the numbers provided by BVP. ↩︎
4. It’s 503 tickers including companies with dual stock classes. ↩︎
5. These are Apple, Nvidia, Microsoft, Alphabet (Google), Amazon, Meta, Tesla and Broadcom. ↩︎
6. This is based on the S&P500 constituent list as of March 2025 and has not been adjusted for changes in the S&P500 constituents over the measurement period. 17 companies in the index today were not public at the start of the measurement period and were excluded from the index. ↩︎
7. Based on 200 US-listed software businesses with market capitalisation over US$100m as of 17 March 2025. Note median and quartiles for each line item are calculated independently. For example, median revenue growth is the median growth for the sample set, not the calculated growth from median revenue. ↩︎
8. As of 17 March 2025. Excludes MicroStrategy from the Top 20 as it is an outlier. ↩︎