Curated Insights 2020.02.07

“25-year-olds should not pay a 31.3x Shiller PE to buy their grandparent’s equities”

“Let’s start with what I’d tell a 25-year-old to not do with investment capital,” answered the CIO. He’d been asked how our youth should invest for 10-15yrs. “I’d tell them to not blindly follow their parents and grandparents as they pay ever higher multiples for a shrinking pool of equity assets,” he continued. In 1982 when Baby Boomers were coming of age, they paid a 6.6x Shiller price-to-earnings ratio for the S&P 500. By 1990 when the median Baby Boomer was 35-years-old, they had bid the Shiller PE to 16.5x. That same year, Baby Boomers owned 33% of all US real estate assets by value. Fast forward to 2020, the median Millennial is 31-years-old and they own just 4% of US real estate assets. If they scrape together a few bucks after paying down student loans, they must pay a 31.3x Shiller PE multiple to buy the S&P 500. “To win a game, play to your strengths, exploit your opponent’s weakness,” said the CIO. “As people age their creativity slips away. Their imagination withers. Their risk appetite fades. Their ambition dwindles. Their drive slides. And this leaves them incapable of reimagining the world, let alone building that future,” he said. “But as people age, they do accumulate capital. And recognizing that this is their only remaining competitive advantage, they unsurprisingly lobby for policies that enhance its value.” Baby Boomers are the wealthiest cohort in all human history. They’ve shifted the game’s rules to entrench their interests. Which has both limited competition for their companies and artificially shrunk the pool of investable equity assets. “There’s too much capital in the world today relative to too few equity assets. 25-year-olds should not pay a 31.3x Shiller PE to buy their grandparent’s equities. They should play to their strengths and fight to build new companies that unseat established ones. Creating new equity assets to ease the acute shortage.”


Underutilized fixed assets

Underutilized fixed assets are the topic of this essay. But all the other variants, such as underutilized variable assets, are important to understand as well. Food delivery is a great example of this. Many people often express disbelief that food delivery startups, have been able to get as many restaurants to sign up for them while charging large take rates (sometimes north of 30% now) from the merchants. “How do these restaurants afford it?” these skeptics ask. What these skeptics fail to understand, is that restaurants do not view deliveries the same way they view customers dining in. There are many factors that restaurants are constrained on including, ingredients, labor, kitchen capacity, and dining space.

For walk-in diners, the primary constraint is dining space. There is an immovable cap on how many tables a restaurant has, and thus how many turns they can do a night. This real estate space is a fully utilized fixed asset. So a startup bringing new diners to a restaurant is entering a zero sum game, especially during peak hours when a restaurant knows they can likely fill all their tables. If a restaurant accepts a diner from a startup and pays them a take rate, this replaces a diner that would have walked in for free. This is the reason why restaurants often don’t list their prime hours on sites like OpenTable. They know they can fill their limited number of tables, so why pay OpenTable a fee for it?

But delivery is different. Real estate space is not relevant to delivery orders. Instead the two main constraints for restaurant delivery are labor and kitchen capacity. Kitchen capacity is an underutilized fixed asset. Most kitchens can handle more orders than they handle each day, but never need to because there’s not enough space in the restaurant for more diners. Like all underutilized fixed assets, restaurant owners are very happy to have their kitchens handle more orders if makes sense.

The other constraint is labor. Restaurants may have some underutilized labor, depending on how busy they are. However, if they have any significant number of delivery orders, they likely would need to have their workers do more shifts, or hire new workers. So labor is an underutilized fixed asset up to some point, but then primarily a variable asset for restaurants.

So when a startup brings new delivery orders to a restaurant, their main question is whether the delivery will be profitable net of the variable costs like ingredients and labor of the restaurant. Other factors like real estate costs are already fixed and so not factored in by restaurants. If these delivery orders are profitable, restaurants are happy to do any and all incremental orders–and will happily pay a higher take rate in return for bringing them the customer. And if the startup brings more customers than they have workers to handle–they’re overjoyed to hire new workers, as long as the economics make sense.

Variable assets are great because they can scale well. However, they are far less preferable to underutilized fixed assets for a number of reasons. Their primary weakness is that they can be copied by competitors. Underutilized fixed assets when discovered are have a huge amount of stored value. The first company to properly use them can increase their value significantly. However, after they’ve burned through this arbitrage, future competitors must find a new way to get advantaged distribution fast. This isn’t true for variable assets as we can see in food delivery. The field is increasingly competitive with Grubhub, Uber Eats, and Doordash all competing in increasingly costly battles.

Why market timing can be so appealing

Why is this so unimpressive? Because I would expect a strategy that literally knows the future to outperform by more than 40 basis points (0.4%) a year! The fact that it doesn’t just goes to show how silly the pursuit of market timing can be.

What does this mean for you? It means that you shouldn’t worry about getting the absolute lowest price when making equity purchases. In fact, you are very likely (95% of the time) not going to get the best price when you buy into the market.

But the good news is that this won’t matter all that much in the long run. Why? Because, for markets with a long-term positive trend, the timing decisions you make with your excess cash won’t be that important.

As you can see, DCA purchases at higher average prices compared to the Absolute-Bottom strategy. More importantly though, the divergences between the average prices are largest during bear markets (i.e. 1974, 2008), but start to converge during bull markets.

This tells us that timing decisions only have a significant impact once in a while (i.e. during big bear markets), so we shouldn’t spend any time worrying about them. Because you will likely lose more by waiting in cash than what you would gain if you did successfully time the market. Choose wisely.

YouTube is a $15 billion-a-year business, Google reveals for the first time

On an annual basis, Google says YouTube generated $15 billion last year and contributed roughly 10 percent to all Google revenue. Those figures make YouTube’s ad business nearly one fifth the size of Facebook’s, and more than six times larger than all of Amazon-owned Twitch.

Separately, Google says YouTube has more than 20 million subscribers across its Premium (ad-free YouTube) and Music Premium offerings, as well as more than 2 million subscribers to its paid TV service. Alphabet says revenues from those products are bundled into the “other” category, which made $5.3 billion last quarter and also includes hardware like Pixel phone and Google Home speakers. That makes it hard to gauge the specific performance of any one product bundled under that category.

U.S. consumers spend more time in TikTok than Amazon Prime Video: App Annie

TikTok saw explosive growth in the U.S. in 2019, growing 375 percent year-over-year in terms of time spent on the platform. U.S. consumers spent some 85 million hours on TikTok in 2019, up from 15 million during the same time last year


CTV’s “walled garden risk” and implications for Trade Desk

The negative take is that Amazon sees potential fragmentation coming to the CTV industry (not just Amazon Fire, Roku, Apple TV, Android TV but also players like Xbox, Samsung, Playstation, Comcast…etc). In case viewership fail to aggregate at the CTV platform level, Amazon wants to be able to aggregate them at the SSP level.

As Amazon Publisher Services (APS) signs up more CTV platforms, this aggregation of eyeballs gives it negotiating leverage over ad buying platforms like TTD.

The article also indicates that Amazon’s SSP is best used with Amazon’s DSP. Whether Amazon extend that optimization to its partnership with TTD remains to be seen. Again, Amazon has the leverage here.

The positive take (for TTD) is if Amazon’s SSP could be used on say Xbox or Playstation, that further shifts CTV industry away from walled garden approach. Also, APS actually allows ad buying from Trade Desk, so the more platforms APS hooks up with, the more TTD benefits.


Worldline to buy Ingenico for $8.6B in major payments consolidation play

The deal underscores two big themes in fintech, and specifically payments. The first is that the shift in payments and spending habits to more digital platforms has meant an increasing amount of fragmentation in the payments space, with each player getting a cut of the transaction: this means that a company doing business in this area needs economy of scale in order to make decent returns. The deal will give both companies a lot more economy of scale.

The second is a bigger theme of consolidation among larger players in part to better compete with the long tail of smaller and more fleet-of-foot fintech companies that have found a lot of traction in this new wave of commerce. While Stripe, Adyen, Google, Apple, Amazon and many of the others may not individually do enough competitive damage against Worldline or Ingenico, their collective presence could.

“Together we create the European World-Class leader in digital payments,” said Grapinet in a statement. “I am convinced that the combination of our respective remarkable talents [SIC] pools, joint capabilities and state-of-the art offers will procure our combined Company an outstanding value proposition to pursue an exceptional growth benefitting to all our clients, banks and merchants alike and to all our business partners. This is a landmark transaction for the industrial consolidation of European payments, highly value creative for all our stakeholders and for the shareholders of both companies, and which ambitions to reinforce the role of Europe within the global digital payment ecosystem.”

Why it only costs $10k to ‘own’ a Chick-fil-A franchise

At $4.2m per store, Chick-fil-A’s average revenue is the highest of any fast-food chain in America, dwarfing both direct competitors (KFC; $1.2m) and bigger brands (McDonald’s; $2.8m). That’s especially impressive considering that all Chick-fil-A restaurants are closed on Sunday.

Based on these figures, Chick-fil-A’s 15% royalty alone (not including its 50% cut of profits) might work out to around $600k per store, per year. (And remember: It still owns the property and equipment.)


Creating a competitive shaving market

According to the research firm Euromonitor, Gillette held 47 percent of the US men’s razor market in 2018, with Edgewell’s brands, which include Schick and Wilkinson Sword, combining for 13.6 percent of the industry. The Harry’s brand, which started selling online but now has a large presence in both Target and Walmart stores, had just a 2.6 percent share at the time, according to Euromonitor. Dollar Shave Club owned 8.5 percent of the US market in 2018, according to Euromonitor, and is owned by Unilever, following a $1 billion acquisition in 2016.

So the FTC thinks that stopping a merger of the number two and four brands in a market is good for competition? I think it is bad for competition and keeping Harry’s and Schick separated will just allow Unilever and P&G to dominate this market going forward. I don’t understand what the FTC is thinking or doing with this case in the least.

Ditch your car: Ridesharing is more cost effective

Can ride-sharing really replace cars? The numbers say if you drive less than 10,000 miles, maybe. However, ride-sharing is a better option for low-mileage users as compared to driving according to this analysis. There are different ways to value your time, which could impact how you value ride-sharing versus driving. But you have more freedom with a car, and don’t have to worry about other passengers, the driver, or not being in control of the vehicle.

Overall, the driving experience is pretty subjective. From a quantitative viewpoint, it’s sometimes cheaper to get a ride share. Qualitatively, it all depends on what you value.

Curated Insights 2020.01.03

Food delivery: Delivering growth, but can they deliver profits?

From the first half of 2017 to the first half of 2019, the total food sales (gross merchandise value (“GMV”)) of listed food delivery platforms in the Western Hemisphere (Uber Eats, Just Eat, Takeaway.com, Delivery Hero, Grubhub) has grown from around US$6.5bn to around US$18bn. In China, the scale is incredible, with Meituan Dianping’s GMV expected to grow from around US$24bn in the 2017 financial year (“FY”) to around US$55bn this year, reaching an annualised run-rate by the end of the year of close to 10bn separate food orders. Further, Alibaba’s Ele.me, which is China’s #2 food delivery platform, will likely enable around US$30bn of transactions this year.

So far Meituan Dianping is the only delivery-led company (delivery makes up approximately 65% of orders) to have turned a modest profit helped by favourable market conditions such as a consolidated market, scale far beyond its Western peers (Chinese orders per capita is approximately 5x vs the US) and easing competitive pressures from competitor Ele.me. This raises questions around whether the model is sustainable in the West.

Our unit economics calculations in various markets suggest that food delivery could theoretically be profitable, provided markets consolidate and rationalise. On average, delivery platforms should make positive gross profits (revenue less delivery costs per order) managing the delivery for independent restaurants e.g. Deliveroo reported a gross margin of greater than 20% in FY17 and FY18[vii]. The bigger question is whether the marketing and promotional costs needed to acquire new customers and incentivise restaurants and riders will begin to fall. Just like the marketplace businesses before them, when the market matures and consolidates to one or two platforms, most of these costs should subside and delivery could yield modest profits. Meituan Dianping is a good example of this, moving from a lossmaking position to slightly profitable in recent quarters as the market consolidated and competitive pressures from Ele.me abated.

Furthermore, most investors and commentators are also ignoring several other key risks. First, food delivery companies, like other tech companies, are the subject of increased scrutiny from regulators for exploiting their market positions. There is a real risk that the unit economics get worse, as regulators force the platforms to cut the commissions they charge independent restaurants and pay riders more. Second, large restaurant chains (e.g. McDonalds) receive very favourable terms from the delivery platforms due to the boost they give to the frequency with which customers use the delivery app. This hurts the economics for the delivery players as they likely lose money on each McDonald’s order. Finally, the business model is untested through the cycle. We often find ourselves wondering if consumers would really be willing to pay $5 to have a $10 Big Mac meal delivered during a recession.

Why Americans are always running out of time

Electric stoves made food prep faster. Automatic washers and dryers cut the time needed to clean a load of clothes. Refrigerators meant that housewives and the help didn’t have to worry about buying fresh food every other day.

Each of these innovations could have saved hours of labor. But none of them did. At first, these new machines compensated for the decline in home servants. (They helped cause that decline, as well.) Then housework expanded to fill the available hours. In 1920, full-time housewives spent 51 hours a week on housework, according to Juliet Schor, an economist and the author of The Overworked American. In the 1950s, they worked 52 hours a week. In the 1960s, they worked 53 hours. Half a century of labor-saving technology does not appear to have saved the typical housewife even one minute of labor.

2020 startup themes

Ad companies are governed by a rule as durable as gravity: they must make their products worse over time. Corporations must produce profit, and the fastest path to increase revenue is at the cost of user experience. Amazon and Google used to feel powerful and sleek. Now they’re like Costco on Black Friday. Noisy, tacky and ad-riddled. And more profitable! (For now.)

This increase in revenue comes at the cost of long-term customer satisfaction, but nobody knows how to really measure that, so investors don’t care. Now Instagram has too many ads and finding a genuine phone charger on Amazon requires a degree in investigative journalism.

Are concert tickets too cheap? Ticketmaster thinks so

The average ticket price for the top-100 world-wide tours rose to $96.17 in 2019, according to music-industry trade publication Pollstar, and has increased 23% in the past five years. Since 1996, the average price for a top-100 tour ticket in North America has climbed more than 250%, according to Pollstar statistics recently cited by Bloomberg News. Though big-name artists command higher prices, “the vast majority of shows are very reasonably priced for fans,” Berchtold said, pointing to amphitheater lawn seats priced in the $30 range. Live Nation said in its Liberty investor presentation that ticket prices for its amphitheaters average $48.

Georgetown University finance professor Jim Angel agrees with Ticketmaster that concert tickets are cheaper than they could be. Concert tickets have historically been underpriced, he said, in part to build fan buzz and loyalty while keeping the artist from looking greedy. “It’s sort of like how investment bankers underprice initial public offerings,” he said. “They want to make sure that the investors have a good experience and that there’s no unsold stock left at the end of the offering.”


Apple ink supplier in Japan makes mark with iPhone 11 Pro colors

In 1972, the company formed a technical alliance with a U.S. ink producer that boasted advanced screen printing technology, which allows for printing on a wide variety of materials. The partnership helped Seiko Advance enhance its own screen printing techniques — still the core of its expertise. Even so, Kabe recalled that the visit to Apple revealed a “very different world.” Suppliers were expected to meet hundreds of criteria. “At that time,” he said, “we found that we couldn’t meet Apple’s high standards.”

After four years of trial and error, the company finally began supplying black ink for iPhones. Now Apple accounts for nearly 40% of its sales, while it also supplies major global smartphone competitors like Samsung Electronics and Huawei. Its inks are mainly used for high-end phones. Inks for appliances, sign boards and vending machines account for the rest. Although the company declined to provide numbers, it said sales are growing, and that becoming an Apple supplier was a major boost.

Seiko Advance has a cleanroom in its factory. Hiraguri says it is the only ink company in the world that has one. This gives it a competitive edge, as controlling temperature and humidity keeps the ink under stable conditions and helps ensure consistent quality.

Skilled workers are equally important. Seiko Advance has 30 experts who specialize in color compounds. They produce 150 colors per day and check them one by one, manually.

Can the American casket monopoly be disrupted?

According to the Casket & Funeral Supply Association of America (CFSA), there were more than 700 casket companies in 1950; by the early 2000s, that figure had been whittled down to 147. Today, Batesville and Matthews dominate the market, making up for more than 8 of every 10 casket sales in the US.

Some estimates suggest that the final price of a casket is anywhere from 300% to 500% more than the cost of making it. In recent years, much cheaper alternatives have become available. Amazon, Walmart, and Costco all sell caskets at around $1k — less than half the average price of caskets from Batesville or Matthews. Yet, even these juggernaut corporations have struggled to chip away at the casket monopoly. Why? Because Batesville and Matthews have strong relationships where casket buying happens: in funeral homes.

The main deterrent for casket competitors is that they aren’t selling caskets where consumers buy them. According to a 2019 IBISWorld report, 82% of caskets are purchased through funeral homes, who capitalize on mourning families by selling them the most expensive products they carry.

We’ve just had the best decade in human history. Seriously

The next time you hear Sir David Attenborough say: ‘Anyone who thinks that you can have infinite growth on a planet with finite resources is either a madman or an economist’, ask him this: ‘But what if economic growth means using less stuff, not more?’ For example, a normal drink can today contains 13 grams of aluminium, much of it recycled. In 1959, it contained 85 grams. Substituting the former for the latter is a contribution to economic growth, but it reduces the resources consumed per drink.

As for Britain, our consumption of ‘stuff’ probably peaked around the turn of the century — an achievement that has gone almost entirely unnoticed. But the evidence is there. In 2011 Chris Goodall, an investor in electric vehicles, published research showing that the UK was now using not just relatively less ‘stuff’ every year, but absolutely less. Events have since vindicated his thesis. The quantity of all resources consumed per person in Britain (domestic extraction of biomass, metals, minerals and fossil fuels, plus imports minus exports) fell by a third between 2000 and 2017, from 12.5 tonnes to 8.5 tonnes. That’s a faster decline than the increase in the number of people, so it means fewer resources consumed overall.

Extreme aging

Japan now has over 70,000 people who are more than 100 years old.

In 1975 social security and healthcare spending commanded 22 percent of the country’s tax revenues; by 2017 the figure, driven up by elderly care and pensions, had risen to 55 percent. By the early 2020s the figure is set to hit 60 percent. To look at it in another way, every other public service in Japan — education, transport, infrastructure, defense, the environment, the arts–could rely on almost 80 percent of tax revenue in 1975, but the increase in elderly-related spending means that only 40 percent is left for other national public expenditures. In budgetary terms, ageing is eating Japan.


Rank-and-file workers get bigger raises

Pay for the bottom 25% of wage earners rose 4.5% in November from a year earlier, according to the Federal Reserve Bank of Atlanta. Wages for the top 25% of earners rose 2.9%. Similarly, the Atlanta Fed found wages for low-skilled workers have accelerated since early 2018, and last month matched the pace of high-skill workers for the first time since 2010.

Hedge funds record best year since 2013 but still trail market

After failing to capture much of 2019’s strong rally in stocks and bonds, the hedge fund industry has delivered an overall return of 8.5 per cent this year, according to data from HFR. Although it is the best performance in six years, it is still well behind the S&P 500’s 29.1 per cent gain this year. The US bond market, measured by a Bloomberg Barclays index, returned 14.5 per cent. 

The relative underperformance raises further questions about hedge funds’ ability to make money in all market conditions: they lagged this year’s bull market but also fared worse than the market during 2018’s sell-off, despite having the ability to bet on falling prices.

Building a rocket is hard. But building a parachute is boggling

Parachutes were so precious to the Apollo program that only three people in the nation were qualified to hand-pack the parachutes for the Apollo 15 capsule: Norma Cretal, Jimmy Calunga and Buzz Corey, who in 1971 — the year of that mission — all lived in Ventura County. Their expertise was so vital, they were not allowed to ride in the same car together for fear that a single auto accident could cripple the space program.


Top speed is overrated

I can drive my Prius from NY to Syracuse faster than I can fly there. Even though a plane has been engineered to have a much higher top speed, the door to door costs of travel (security theatre, parking, checking in, the rest of the last mile once I land) aren’t impacted at all by the top speed of the chosen form of transport.

Top speed is easy to measure and fun to work on. But for most of the people you work with, there are dozens of factors that matter more than the easily measured versions of top speed that are talked about.


Does happiness in your 50s signal the end of ambition?

“This is about realizing that we’re going to die one day and being more selective in who we spend time with [and] fully accepting that we’ll never achieve many things,” says Arthur Stone, professor of psychology, economics, and health policy and management at the University of Southern California. He adds that these realizations tend to leave people with smaller but more enriching social circles, a predilection toward happiness over hassle and a higher likelihood of general contentment.

Curated Insights 2019.11.01

GrubHub shareholder letter (October 2019)

A common fallacy in this business is that an avalanche of volume, food or otherwise, will drive logistics costs down materially. Bottom line is that you need to pay someone enough money to drive to the restaurant, pick up food and drive it to a diner. That takes time and drivers need to be appropriately paid for their time or they will find another opportunity. At some point, delivery drones and robots may reduce the cost of fulfillment, but it will be a long time before the capital costs and ongoing operating expenses are less than the cost of paying someone for 30-45 minutes of their time. Delivery/logistics is valuable to us because it increases potential restaurant inventory and order volume, not because it improves per order economics.

Earlier, we talked about the great progress we are making with enterprise brands. We love working with large enterprise brands because they help drive new diners to our platform and keep diners from going to other platforms. That said, the biggest enterprise brands don’t need Grubhub to bring them new diners in the same way independents and small chains do because they spend billions a year on developing their own brands. What they need most is a driver to take the food to their diners. And, as we just noted, that isn’t cheap, or particularly scalable, so the unit economics and long term profit outlook for our business would look very different if a majority of our business was coming from large enterprise brands.

Life of pie: A closer look at the Domino’s Pizza system

The key to operating a successful Domino’s master franchise is to have the Domino’s brand stand out against all the other pizza options that are available in the marketplace. In other words, the brand has to be put to work to generate demand, which can only be achieved with significant marketing spend. Tv is still quite important for Domino’s and generally requires a significant advertising budget. That budget has to be levered on a good number of restaurants in order to make sure the marketing expenses stay at a reasonable level per store.

Every new market that’s entered starts more or less from scratch, with limited consumer awareness and entrenched behavior that benefits the incumbents. This is why it is so difficult for a new Domino’s market to get to a scale that makes economic sense. Once you manage to reach that scale that the flywheel can start spinning, because at that point the business can self-generate its growth through reinvestment in marketing.

It appears that the entire Domino’s franchise has come under a bit of pressure from aggregators like Takeaway, Uber Eats, Grubhub and Doordash, which are oftentimes operating at a loss. Since the aggregators are providing access to technology platforms that many small operators would not be able to afford or operate on their own, they’ve essentially levelled the playing field for pizza restaurants again. In my opinion this has decreased Domino’s Pizza’s advantage in the mobile ordering space. Domino’s Pizza Inc.’s CEO conceded recently that the aggregators are indeed having an effect on their same store sales growth (item below). For now I have no strong conviction on Domino’s but it is a business with some fascinating developments.

Schwab kills commissions to feed its flywheel of scale

“ we did not expect such a swift reaction in the sense that we thought that we come out with IBKR Lite as an additional offering and that we go on for a while, and will attract some customers and then eventually, other people will start reducing and maybe all go to zero. So this — this very swift reaction was a surprise to us.” – Thomas Peterffy, Founder and Chairman, Interactive Brokers Group (IBKR), 3Q 2019 Earnings Call

We believe Schwab’s business stands to benefit the most because of the relatively small impact to its revenue and income and the broad, efficient set of high quality service it offers to clients. While the commission cuts mean Schwab offers an even more compelling value to its customers for its existing suite of high quality services, a disadvantaged competitor like TD Ameritrade is trying to figure out how to charge for its “premium” services for customers, effectively raising prices for service in other ways and depressing its value proposition.

Decades of experience indicates the companies offering higher value propositions win more customers. By continuing to pursue aggressive reinvestment in both client service and technological efficiency, Schwab can continue to leverage its growing scale to further improve upon the value proposition it provides clients while continuing to drive down its expense (efficiency) ratio. We believe the gap in differentiation will only get wider now that the smaller competitors are much weakened financially, which is why it made sense for Schwab to be so aggressive in cutting commissions both in 2017 and again October 2019.

An Elastic technical review

Elastic isn’t building a cloud side and a on-prem side to their platform like MDB is. It’s all Elastic Stack in the Elastic Cloud, just hosted at whatever cloud provider the customer desires, and managed by the finest experts one could find — thems that wrote it! There isn’t tooling appearing in Elastic Cloud that isn’t in core platform, unlike MDB with their Stitch serverless platform. However, the downside is that their Elastic Stack releases must bundle the proprietary modules side-by-side with the open-source products.

One striking difference as I walked through the product line, is the number of use cases it solves that DO NOT INVOLVE CODE. MDB is for developers only, to embed into their application stack. Elastic is for that, but also for non-developers to use without needing any custom development. IT can hook up Beats for monitoring infrastructure or network traffic. Enterprise users can feed in datasets with Logstash, for staff to query, visualize, or apply ML in Kibana. I expect this trend to continue, as it really opens up the applicability as to who can use the product line.

Best of all, Elastic is making exciting moves that are moving their company beyond being a do-it-yourself tool provider.


Third Point’s Q3 letter: EssilorLuxottica thesis

Our analysis of potential merger synergies points to over €1 billion in additional profit through efficiencies and revenue growth, almost double the Company’s current targets. In the near‐term, this will be driven by cross‐selling to wholesale customers, insourcing lens procurement, and supply chain efficiencies. The longer‐term opportunity to disrupt the industry value chain is even more appealing: combining lens and frame to shrink raw material need and waste, reducing shipping costs by merging prescription labs with global distribution hubs, and providing a true omni‐channel sales offering. These initiatives will transform the way glasses are sold, significantly improving the customer experience.


Ensemble Capital client call transcript: Mastercard update

While you might hear about how merchants pay 2% or more in credit card fees, Visa and Mastercard are only collecting about 1/20th of that fee, with the banks, the ones taking the credit risk, earning the bulk of the fee.


Ensemble Capital client call transcript: Tiffany & Co update

Tiffany is one of just a few global American luxury brands and the casual observer cannot tell a Tiffany diamond engagement ring from one purchased elsewhere. There’s no room on a diamond for logo placement, after all.

As a company, Tiffany is older than Cartier (founded in 1847), Louis Vuitton (founded in 1854), and Burberry (founded in 1856). This durability matters in luxury because it communicates a brand’s ability to endure all kinds of major socioeconomic changes and remain relevant over successive generations. It also communicates a certain timelessness of core products that remain in fashion despite intermittent fads and trends.

The advertising industry has a problem: People hate ads

“It’s harder to reach audiences, the cost of marketing is going up, the number of channels has exponentially proliferated and the cost to cover all of those channels has proliferated,” Jay Pattisall, the lead author of the report, said in an interview. “It’s a continual pressure for marketers — we’re no longer just creating advertising campaigns three or four times a year and running them across a few networks and print.”

That includes automation and machine learning technologies, which Forrester expects will transform 80 percent of agency jobs by 2030. In July, JPMorgan Chase announced a deal with the ad tech company Persado that would use artificial intelligence to write marketing copy.

Steven Moy, the chief executive of the Barbarian agency, said that multiyear contracts had shortened, with budgets tightening and performance metrics becoming more stringent.

For the first time ever next year, Facebook, Google, YouTube and other online platforms are expected to soak up the majority of advertising dollars, according to WARC.

Last year, 78 percent of members of the Association of National Advertisers had an in-house agency, up from 58 percent in 2013 and 42 percent in 2008.

Curated Insights 2019.09.20

The financial Turing test

Imagine we could simulate the universe where each time you are born to different set of parents with a different genetic makeup. Sometimes you are born a man. Sometimes you are born a woman. Sometimes black. Sometimes white. Sometimes smart. Sometimes not. Etcetera etcetera. What would you do to have the highest probability of becoming financially secure regardless of your background?

If you wanted to re-state this question more simply, it is: How do you get rich without getting lucky?


Product-user fit comes before product-market fit

The jump from product-user fit to product-market fit is no trivial leap. Skipping what to focus on during the product-user fit stage and prematurely racing to spark the market adoption can actually decelerate your path to product-market fit. Forcing growth on a product that isn’t yet ready for broader adoption will not ultimately convert to a market of highly retained, happy users. And if you don’t listen to the early power users closely enough, you may never discover the insights that get you to a world-class product.

Power users are the biggest sign of product-user fit. Making the leap from product-user fit to product-market fit is about listening to these users to evolve your product to attract more users. When exploring products that have only been in market for a short amount of time, the behavior of power users is often more interesting and important than any aggregate metrics. If the goal is to “make something people want,” then continuously talking to and observing early power users is the only way to really understand what drives both user retention and non-user activation.

5 reasons to consider buying Berkshire Hathaway

First, we think Berkshire’s broad diversification provides the company with additional opportunities and helps to minimize losses during market and/or economic downturns. Berkshire remains a broadly diversified conglomerate run on a completely decentralized basis, with a collection of moaty businesses operating in industries ranging from property-casualty insurance to railroad transportation, utilities and pipelines, and manufacturing, service, and retailing. The economic moats of these operating subsidiaries are built primarily on cost advantage, efficient scale, and intangible assets, with some of these businesses being uniquely advantaged as well by their ability to essentially operate as private companies under the Berkshire umbrella. The operating subsidiaries also benefit from being part of the parent company’s strong balance sheet, diverse income statement, and larger consolidated tax return.

Berkshire’s unique business model has historically allowed the company to–without incurring taxes or much in the way of other costs–move large amounts of capital from businesses that have limited incremental investment opportunities into other subsidiaries that potentially have more advantageous investment options (or put the capital to work in publicly traded securities). The managers of Berkshire’s operating subsidiaries are encouraged to make decisions based on the long-term health and success of the business, rather than adhering to the short-termism that tends to prevail among many publicly traded companies. Another big advantage that comes from operating under the Berkshire umbrella is the benefit that comes with diversification not only within the company’s insurance operations, but also within the organization as a whole. In most periods, it is not unusual to see weakness in one aspect of Berkshire’s operations being offset by the results from another or from the rest of the organization.


We can be weird, or it can be public

WeWork seems to be facing the traditional tradeoff: Stay private, keep control, but lose access to billions of dollars of funding, or go public, raise unlimited money, and have to act normal. If it does either of those things, that will mark a sort of end of an era. At the height of the unicorn boom, big tech companies could stay private without giving up the benefits of being public, or they could go public without taking on the burdens of being public. Now they might have to make hard choices again.

Shopify is now a major player in e-commerce. Here’s how it happened, according to the COO

Over the years, we’ve also realized as we grow bigger, we have incredible economy of scale. If you were to aggregate all our U.S. stores [customers’ sales volume] we would be the third-largest online retailer in the U.S. Amazon is first, eBay second, and Shopify is a very close third. What that means is when we go to the payment companies, when we go to the shipping companies or go to anyone, we negotiate on behalf of more than 800,000 merchants. Instead of keeping the economies of scale for ourselves, we distribute [the benefits] to the small businesses. I think that’s why we have been really successful.


The foodoo economics of meal delivery

The newbies, born more recently, have turned a once-tidy business into a food fight. They include listed firms such as Meituan of China and Delivery Hero of Germany, Uber Eats (part of Uber), Ele.me (owned by China’s Alibaba), and privately held DoorDash, based in San Francisco, and Deliveroo, from London. For most of them, delivery is their core business, so they share their cut of the bill with riders as well as restaurants. This substantially broadens the market to restaurants offering everything from steak to Hawaiian poké bowls. But margins suffer. Funded largely by venture capital, they have thrown subsidies at customers, forcing their veteran rivals onto the defensive. To catch up, the veterans are investing in advertising and delivery networks—at a big cost. This week Grubhub and Just Eat reported slumping earnings, and Takeaway mounting losses, as they spent heavily to fend off the upstarts.

The only mouthwatering aspect of the delivery business is its potential size. According to Bernstein, a brokerage, almost a third of the global restaurant industry is made up of home delivery, takeaway and drive-throughs, which could be worth $1trn by 2023. In 2018 delivery amounted to $161bn, leaving plenty of room for online firms to expand; the seven largest increased revenues by an average of 58%. Their businesses support the trend of 20- and 30-somethings to live alone or in shared accommodation, with less time and inclination to cook. In China, by far the biggest market for food delivery, one-third of people told a survey that they would be prepared to rent a flat without a kitchen because of the convenience of delivery. Delivery also fits neatly with the gig-economy zeitgeist, alongside ride-hailing firms such as Uber, Lyft and China’s Didi.

Moreover, potential growth may be overstated. Subsidies make true demand hard to gauge. When delivery charges and service fees eventually rise, which they will have to if profits are to materialise, some customers may flee. In the meantime, cheap money lets firms undercut rivals but distorts incentives. The war of attrition could get even worse if giants like Amazon muscle in, as it has tried to do by buying a stake in Deliveroo (the deal is stalled at present because of antitrust concerns). Alibaba, Amazon’s Chinese counterpart, uses Ele.me as a loss leader helping drive traffic to its profitable e-commerce sites.

Untangling the threads: Stitch Fix is a bargain

There have been numerous ecommerce 2.0 flameouts over the past decade (e.g. Gilt Groupe, Fab.com, Birchbox, Shoedazzle, Beachmint, One Kings Lane). Venture capitalists flocked to these businesses due to large addressable markets and strong top-line growth. To be fair, there have been some big winners (e.g. Wayfair) which can justify the VC game. But as Bill Gurley points out, innovations around pricing or distribution — think flash sales and subscriptions in a box — don’t represent core differentiation or sustainable competitive advantages. Additionally, these startups had access to hundreds of millions of VC funding and therefore weren’t forced to prove out the unit economics before scaling rapidly.

Are Airbnb investors destroying Europe’s cultural capitals?

The definitive story of how a controversial Florida businessman blew up MoviePass and burned hundreds of millions

Farnsworth’s pitch to MoviePass: $25 million for 51% of the company, two seats on the five-member board, and a promise to drop the monthly subscription price, temporarily, from $50 to $9.95, with the goal of hitting 100,000 subscribers. If all went well, the next step would be taking MoviePass public. But Farnsworth’s plan worried Spikes; to him, $10 a month was too low. At that price MoviePass would start losing money when a subscriber used the service more than once a month.

In the US, the average price for a movie ticket is about $9; if a customer ordered a ticket every day for a month (the maximum the MoviePass plan allowed), it would cost MoviePass about $270, of which the subscriber’s fee would cover just $10. But in July 2017, the MoviePass board agreed to the deal. And on August 15, the price drop went into effect. Thanks to word-of-mouth buzz and press attention, within two days subscriptions jumped from about 20,000 to 100,000. MoviePass had transformed from a scrappy startup trying to keep the lights on to a disrupter in the making.

But Spikes saw a looming disaster. The company was overwhelmed by its overnight success and couldn’t keep up with demand. A quarter-million new subscribers were signing up every month, and MoviePass customer-service lines were flooded with complaints from people who had been waiting weeks for their cards. MoviePass had lowballed the number of cards it would need after the price drop. It got to a point where the vendor making the MoviePass cards didn’t have enough plastic and had to call on its competitors to fulfill all the card orders. “We all knew we were selling something we couldn’t deliver on,” one former staffer said.

Pat Dorsey: Never put any moat on a pedestal

The same way you evaluate any other business, which is trying to think about the present value of future cash flows. This is an area where the world has changed pretty significantly over the past couple of decades because, 30 years ago, most investments were done via the balance sheet. They were investments in buildings, in factories, in railroads, in locomotives and all those came out of the balance sheet. Today, a lot of investment happens out of the income statement. If you are a software company, and you are acquiring new customers, who might have a nine to 10-year lifespan with the business, that comes out of sales and marketing, and so that depresses your current margins.

But it seems insensible to me to argue that I should not invest in a customer who could be with me for 10 years and who will pay me 3% more every year as I raise prices. Why is that not just as valuable an investment as a machine that will wear out in 10 years? One is an appreciating asset and the other is a depreciating asset. The former — the customer — comes by way of investing through the income statement and depresses current margins. As for buying the machine, it is just a capital expenditure. If you have a business that is re-investing heavily today, a software company or an Amazon for example, you have to think about the incremental unit economics. How much does it cost to acquire each customer and how much value do they deliver over some span of time, and then try to think about what does this business look like at steady state, say in a five or 10-year timeframe. You know what margins it will have once the investment slows down and then you discount those cash flows back to the present.

So far, Uber and Lyft have competed very heavily on price. That was evident in both of their IPO filings, they have been trying to undercut each other on price, which is not the sign of a healthy competitive dynamic that’s going to result in great return for shareholders. Maybe that will change, I don’t know. But, when I see two big companies trying to basically undercut each other on price and, it’s not really clear who is going to win, I’d rather just stay on the sidelines and watch. One of the most important things for an investor to do is to maximise return on time. By analysing Uber and Lyft, we probably aren’t going to get a lot of advantage, because everybody and their mother is trying to have an opinion on these things, and it’s just not clear how the competitive dynamics will pan out long term. So we’ve spent literally zero time on them!

A lot of it comes down to the unit economics of the business. Boeing and Airbus need to absorb a lot of fixed costs. Building an aircraft factory, investing and designing a new aircraft, requires a lot of very high fixed costs, and so they need to absorb that. And so, each incremental plane sold is very important to both companies. So they need to take market share from each other. Whereas for Visa and Mastercard, their fixed cost for the payment networks, those costs were sunk decades ago. Their network is there. It exists. So there’s no incentive to compete on price, because they don’t have the same economics of cost absorption.

When to sell and when a moat is weakening are really two different questions. But I would say, the biggest signal that a moat is weakening is the lack of pricing power. If a business historically had been able to raise prices and is no longer able to raise prices, that generally indicates that its competitive advantage is weakening or disappearing.

Howard Stern is getting ripped off

Take a look at Joe Rogan, who currently has the most popular talk show podcast with over 200 million downloads per month. This number comes from Joe himself¹, but let’s assume he was exaggerating and it’s only 100 million downloads per month.

Assuming he sells ads at a low $18 CPM (cost per thousand listeners) and sells out his ad spots, he’s making approximately $64mm in annual revenue. If he’s on the higher end, at $50 CPM, he could be making as much as $240mm per year². The only factor that would change this is how many free ads Joe gives to companies that he has a personal equity stake in (like Onnit, the supplement brand he co-owns).

That means that Joe makes somewhere between $64-$240 million per year in revenue from his podcast advertising alone—and that’s handicapping his audience by half what he claims to have. That number also doesn’t include any additional revenue generated from his wildly popular YouTube channel, which has over 6 million subscribers.

Based on existing advertising revenues alone, Joe Rogan could easily be worth over a billion dollars, even if he doesn’t realize it. If estimates are correct, he owns a business that produces somewhere in the neighborhood of $60-$235 million/year in profit and is likely growing at 30–50% annually (assuming his audience is growing alongside the podcast ecosystem)³. If it were publicly traded, his podcasting business could easily fetch a valuation in the billions.

Even the small stresses of daily life can hurt your health, but attitude can make a difference

When people talk about harmful stress — the kind that can affect health — they usually point to big, life-changing events, such as the death of a loved one. A growing body of research suggests that minor, everyday stress — caused by flight delays, traffic jams, cellphones that run out of battery during an important call, etc. — can harm health, too, and even shorten life spans.

Curated Insights 2019.08.16

The arc of collaboration

As the ecosystem of specialized SaaS apps and workflows continues to mature, messaging becomes a place of last resort. When things are running smoothly, work happens in the apps built to produce them. And collaboration happens within them. Going to slack is increasingly a channel of last resort, for when there’s no established workflow of what to do. And as these functional apps evolve, there are fewer and fewer exceptions that need Slack. In fact, a sign of a maturing company is one that progressively removes the need to use Slack for more and more situations.

And core Dropbox is not a solution to this. People store their documents in it. But they had to use email and other messaging apps to tell their co-workers which document to check out and what they needed help with. Dropbox understands this concern. It’s what’s driven their numerous forays into owning the workflows and communication channels themselves. With Carousel, Mailbox, and their new desktop apps all working to own that. However, there are constraints to owning the workflow when your fundamental atomic unit is documents. And they never quite owned the communication channels.

Slack is not air traffic control that coordinates everything. It’s 911 for when everything falls apart. Every slack message about a new document your feedback is wanted on or coordinating about what a design should look like is a failing of process or tools. Slack is exception handling. When there’s no other way to make sure someone sees and update, or knows context, Slack is the 911 that can be used.

And as Figma expands into plugins, the ecosystem will continue to solve for more and more of the needs and exceptions. Over time, our workflows align with our functional flows. And collaboration is no exception. And Figma is not alone. More and more apps in all categories understand that collaboration should and must be built in as a first party if they want to best serve their customers. Notion, Airtable, etc all understand this. The feedback loops of collaboration get so short that they become part of the productivity loop.

Disruption: Finding the right balance in confinement care

Unlike 28 Days, Pantang Plus has 150 confinement therapists (aged between 25 and 60) working directly with the start-up. The company had to recruit a workforce of that size after they were challenged to do so. “During MaGIC’s accelerator programme in 2016, we could only handle four therapists at a time. But after that, we were tasked to take in 100 of them. So by word of mouth, we managed to recruit 102 therapists,” says Zamzana, adding that Pantang Plus also received a RM30,000 grant to kick off its business.

When orders started pouring in, the company needed to process the transactions quickly. It was difficult as it had to accommodate massage bookings, process quotations, confirm orders and send out therapists. After enlisting Hisamudin, a former systems engineer who had sold his media start-up, she managed to expedite the processes. The duo were coached to focus on a certain segment and they chose the affluent and urban market.

According to Hisamudin, by tapping this particular segment, they get fewer customers but each of them is more lucrative. The company managed to grow its business from 20 bookings in 2016 (which work out to about RM43,347 in sales) to 156 bookings (RM418,540) last year. Since its debut, the company has paid out about RM280,000 to therapists.

Before the online platform was set up, there was a lot of back and forth with the customers and building trust was not difficult, says Zamzana. But now that a lot of the processes are automated, she has noticed that customers are more hesitant and apprehensive about the services it offers. “So, I created a standard operating procedure (SOP) where we meet with customers for personalised consultation sessions so we can manage their expectations,” she says.

There is also an SOP for customers to protect the therapists. “There have been cases where they were mistreated, paid unfairly or were told to do all sorts of things beyond their job scope. The SOP lays out the conditions that govern the packages that are subscribed to. So, I take full responsibility if the customer is not satisfied or if the therapist is mistreated,” says Zamzana.

Hisamudin says the company is constantly improving the platform to automate the back-end process for both the customer and therapist. “We also plan to automate the payment gateway so we don’t have to check whether we have received payments from customers, which can be tedious,” he adds.

WeWork’s S-1: some quick observations

In connection with this offering, Rebekah and Adam are dedicating additional resources to amplify the positive global impact of our organisation. This effort is designed to enable us to scale our social and global impact as the Company grows. Rebekah and Adam Neumann have pledged $1 billion to fund charitable causes. To fulfil this pledge, Rebekah and Adam will contribute cash and equity to charitable causes within the 10 years following this offering. Their first contribution aids in the conservation of over 20 million acres of intact tropical forest, including the region pictured on the final page of this prospectus. To evidence their commitment to charitable causes and to ensure this commitment is meaningful, if Adam and Rebekah have not contributed at least $1 billion to charitable causes as of the ten-year anniversary of the closing date of this offering, holders of all of the Company’s high-vote stock will only be entitled to ten votes per share instead of twenty votes per share.

Adam currently has a line of credit of up to $500 million with UBS AG, Stamford Branch, JPMorgan Chase Bank, N.A. and Credit Suisse AG, New York Branch, of which approximately $380 million principal amount was outstanding as of July 31, 2019. The line of credit is secured by a pledge of approximately [blank] shares of our Class B common stock beneficially owned by Adam. In addition, JPMorgan Chase Bank, N.A. has made loans and extended credit to Adam totalling $97.5 million across a variety of lending products, including mortgages secured by personal property. None of these other lending products are secured by a pledge of any of Adam’s shares of capital stock in the Company.

Asset managers with $74 trillion on brink of historic shakeout

In this new environment, the beneficiaries have been the world’s largest asset managers, who are wielding far more influence and increasingly attracting a larger share of investor money. They’ve been able to take advantage of their size to keep overall expenses down and help make up for lower fees. Crucially, they’re also the most likely to be offering both passive investments as well as actively managed funds. That means the biggest firms are just getting bigger: The two largest U.S. indexing titans—BlackRock Inc. and Vanguard—oversee combined assets of around $12 trillion this year, up from less than $8 trillion just five years ago.

Fidelity Investments once boasted the world’s largest mutual fund. But the Fidelity Magellan Fund that stock-picking star Lynch propelled from a $20 million offering into a multibillion-dollar behemoth is not even in the world’s top 25 mutual funds today, according to Morningstar. In a sign of the times, only three of the top 10 funds worldwide are actively managed funds, Morningstar data show.

Europe’s fund industry has remained fragmented, in part, because it’s dominated by divisions of banks and the link hasn’t been an advantage as the financial firms focused less on building their fund units and more on averting crisis after crisis.

The booming, ethically dubious business of food delivery

In 2020, more than half of restaurant spending is projected to be “off premise”—not inside a restaurant. In other words, spending on deliveries, drive-throughs, and takeaway meals will soon overtake dining inside restaurants, for the first time on record. According to the investment group Cowen and Company, off-premise spending will account for as much as 80 percent of the industry’s growth in the next five years.


How the supermarket helped America win the Cold War

Between 1946 and 1954 in the U.S., the share of food bought in supermarkets rose from 28 percent to 48 percent. By 1963, that number had risen to nearly 70 percent. A&P had so much market power that the Department of Justice went after it for anticompetitive practices. This was an interesting development, considering that the U.S. Government played such a significant role in the creation of supermarkets in the first place.

RV Capital’s view on Variable Interest Entities

The VIE structure is incredibly favourable from a Chinese perspective. Control of the companies remains in China. The contractual right to cashflow is mainly theoretical as most companies reinvest most of their earnings (which makes sense given the opportunities for growth). Finally, it aligns with the government’s legitimate aim to foster a competitive and vigorous economy that the costs of said competition are borne in part by foreign capital whilst the benefits accrue exclusively to its citizens. Why would China ever do anything to risk the VIE structure when anything that superseded it could only possibly be less favourable?


Tenure voting and rethinking what’s fair in corporate governance

Tenure-based voting would allow all shareholders to have an equal opportunity to earn a greater say in a company’s governance. All longer-term investors — with the definition of “longer term” agreed upon by the company and its shareholders — would earn more rights to weigh in on strategy and management, while shorter-term investors would simply vote with their feet by selling their shares if they aren’t aligned with that strategy. In adopting a tenure-based voting system, a company and its shareholders would need to determine the time periods associated with higher-vote stock. For example, all shares could start with one vote per share as of the acquisition date of the shares, and after, say, a two-year hold period, accrete to 1.5 votes per share, with perhaps additional votes per share for each additional holding period. If an investor were to sell her shares, the new holder of the shares would start at one vote/one share and begin a new holding period. The rules could be tailored to achieve whatever goals the shareholders have in mind, probably requiring a majority of shareholders to approve the initial plan (or any substantive modifications).