Thoughts about Emerging Megatrends and business models

Thoughts about Emerging Mega-trends and business models

The month of March is greeted by unprecedented volatility among the technology sector. As vaccines are distributed worldwide, investors / speculators are pricing in recovery of the traditional economy. There were concerns about heightened valuations of the gloves stocks, tech stocks and potential regulatory crackdown on the Chinese and US technology sector. This contributed to a selloff among the <Pandemic stocks>  as some investors rotate to cyclicals, quantitatively cheap value stocks and airline / hospitality / banking stocks.

 

As I have made an active decision to invest in stronger businesses and avoid market timing especially in cyclicals outside my area of competence, I capitalized on the technology stocks selloff and allocated capital among the stronger business models. I am still uncomfortable with the widespread speculative behaviour in the reddit WSB space, crypto space, money losing companies as well as some of the untested emerging  business models and decided to stick to areas closer to my circle of competence (which is limited but expanding). Some of the disruptive business models are interesting but are out of my circle of competence for now. But I believe they will not be going away anytime soon and it may erode the moats and margins of traditional business / blue chips and competitive position eventually.

E commerce Models

JD.com / Amazon  - Heavy capex and logistics  infrastructure buildup for sorting and delivery to homes, focus on lowest cost products, huge scale logistics and vanilla products / electronics. (Displacing traditional FMCG businesses)

 

PDD / Shoppee - Gamified Shopping instead of vanilla platforms, heavy marketing spend and customer acquisition costs (CAC) to grab market share. There are interesting articles about how first mover eCommerce platforms are being disrupted by the emerging eCommerce platforms (PDD displacing Alibaba) and (Shoppee displacing Lazada)

 

Favepay / Meituan / Google pay - Online prebooking and Lifestyle app, booking online then purchases at physical shops. Particularly popular with physical retail stores / massage outlets / cinemas  that have a fixed cost base and required huge human traffic to stores to justify their cost of operations. Apps are integrated with retail Point of Sales Systems for business promotions, distributions and revenue analytics.  General lower logistics but higher customer acquisition cost and more dependent on generating network effects at the merchant side before attracting consumers on the demand side to generate a flywheel effect

Financial Industry

Shoppee pay, Google Pay - disrupting traditional duopoly incumbents like MasterCard / Visa. Visa is strategically positioning itself as the middleman between the apps and the banks and leveraging its banking relationships to delay obseletion. Potential technological obseletion from blockchain based payment networks (Huge Known unknown)

SEA / Square / Ant Financial - Digital Banking platforms without the huge cost base of traditional bank branches and more reliant of a client self service instead of the <Telco customer support> business model. These companies generally capitalize on regulatory arbitrage as Fintechs are not heavily regulated despite operating in the same industry and promote an asset light model that distinguish themselves from regulatory capital intensive traditional banks. The increased commoditization of financial services is now under a harsher spotlight more than ever.

Endowus, Syfe, Vanguard Blackrock ETFs - Investment advisory services disrupting active managed funds (Apart from a rare few like Cathie wood and Terry Smith) as they promote a low cost / low expense ratio with generally strong investment performance and engage in skillful marketing and easy to use platforms for investors slush with cash to allocate capital to.
 

Virtu, Citadel, Robin hood - Payment for Order flow disrupting the traditional commission driven model of traditional brokers. Margins of traditional brokers might be permanently impaired as retails traders / investors are indoctrinated on the <new normal> commission free trading. The execution Volumes of the US stock exchanges will also eroded as more order flows are executed within the hedge fund market maker books instead of stock exchanges.

Television content
Disney Plus / Netflix - Subscription based TV content disrupting tabletop TV providers, traditional content providers like Mediacorp-se,  as well as the three local telcos tabletop offerings based on their pricing, sheer content base, and generally more-in-demand content. These business heavily invest to generate original content based on their analysis on consumer behaviour / existing franchises and take on the risk of creating creative content /partnering with established studios (generally riskier model than the YouTube outsourced content creator model)

Advertising Industry
Google / Facebook - disrupting traditional television and newspapers continually close to 2 decades.

Programmatic advertising - Disrupting the traditional decentralized labour intensive advertising booking between ad agencies, in favor of a centralized, targeted audience and cost effective advertising campaigns. This business model runs parallel to the traditional brokerage industry whereby manual bookings are increasingly replaced by online bookings and algorithmic matching of ad orders and ad inventory.

Google / Facebook is operating a Broker-Dealer-Exchange model whereby they control the ad space inventory (dealer) as well as the ad booking assets (broker) resulting in an inherent conflict of interest. Buy side platforms like TTD is focused on the buy side broker-Exchange model and reducing conflict of interest and building stronger client relationships. Their strategic slant is towards the bargaining power of buyers among the infinite supply of ad inventory via connected TV and online ad spaces.

 

Portfolio decisions for the month of Mar 

I initiated a mid conviction position in TheTradeDesk on 5 Mar 2021 at the Price of USD 630 when the Nasdaq and Adtech stocks corrected significantly upon the release of Google's new policy about phasing out of third party Cookies to favor user privacy. I think the discount to TDD is unwarranted as its Unified ID solution is not affected by the policy. I believe Programmatic advertising is solving a real world problem among the traditional advertising industry by booking targeted ads that are results driven, cost effective and saves companies on a lot of time and money when allocating their advertising budgets. Online centralized booking of ads can overcome travel restrictions between states and countries and provide an analytical way for companies to analyse and justify their ad spend. Programmatic advertising is aided by the huge tailwind of connected TVs from retail adoption of  Netflix / Disney Plus. There is also the immediate need for advertisers to capture the pent up spending of consumers, while managing the limited budgets by companies emerging from the pandemic.

Although the huge and growing addressable market and business model and margins are very attractive, TTD nosebleed valuation and competitive landscape, as well as the uncertain moat of the business, forced me to only initiate an entry position in the recent correction. I will monitor the developments of this company periodically to see if there are any updates.

I averaged up a high conviction position in MSFT on 19 Mar 2021 at the price of USD 230. I am bullish on the prospect of its market leading position on cloud computing as well as the acquisition of its gaming studios which are tied to the core competence of MSFT. The developments in Xbox is impressive as MSFT seeks to add original franchises to its Xbox Portfolio, there are scuttlebutt reports of XBOX controllers going out of stock and the general popularity of its hardware products, and MSFT is rolling out premium subscription plans to entice gamers to gain access to huge portfolio of games on a SAAS basis. As the growth of cloud computing continues, MSFT (despite the recent Email exchange hacks) is also positioned in the cybersecurity market and can integrate its services with its cloud offerings. The prospect of cloud gaming and <Microsoft Mesh> seem compelling and the product centric culture (eat your own dog food) propagated by Satya Nadella seems to be working. 

MSFT is not cheap and there is a real risk of overpaying for a quality company. Its acquisitions may also turn out poorly and there is also possible mishandling of its gaming Franchises like <Age of Empires Online> in the past. However, I believe it is reasonably priced after considering its growth prospects and I hope that my longer term horizon can mitigate the valuation risks

Conclusion
As I had drawn down on my warchest in the Nasdaq correction, there is nothing much I can further do in the midst of market volatility. I will stay disciplined and tune out the noise and FOMO behaviour if there are more severe corrections on the month of April. I shall endeavor to be disciplined in my CFA exam preparations for the months ahead!