Friday, May 29, 2015

Amazon Stock Lifts

- Amazon stock ticks up
- Vanity economy
- Human Capital
- What company could be the 5th Horseman of the Digital World?
- Nike – Because denim is dying

A few months ago, I had noted that Amazon seemed to be in the business of losing in the hundreds of millions of dollars per quarter and growing, it's $20 Bn+ revenue numbers insulating it from losses that would be the death knell of any other company and even some countries, But the online retail behemouth was a winner this week, due to a 15% increase in its stock price. While the usual status of high growth with low earnings continued, Amazon’s cloud storage business impressed Wall Street with over $1.5Bn in EARNINGS in Q1, on track for 6Bn this year. That'll make up for a LOT of shipping losses. A number of recent reports on E-Commerce Agility have shown that cloud solutions offer better flexibility in international markets, and therefore make scaling easier. Clearly many companies are turning to Amazon to put the flexibility of cloud to work for them.

Beauty, luxury and apparel make up the vanity economy, which is expected to grow from 3.5 Trillion to over 4.5 trillion over the next 3-5 years, driven largely by China. In 5 years, vanity may be one of the most successful sectors of the economy. Possibly only surpassed by the HealthCare sector. And Philips is a major player in both of them. Let's keep it in in mind and play to our strengths.

Last month, we discussed how Amazon, Apple, Facebook, and Google are 4 companies who collectively equal the population of Lexington, Kentucky with 310K employees. But with those employees, the companies generate the equivalent of Australia's GDP at a little over 1.5 Trillion in Revenue a year. That's almost 10Mn in revenue per employee per year. By contrast, the worlds richest principality, Monaco, has a per captita GDP of 163K.

Earlier this month, L2 Research dug deeper on that, releasing 2 studies centering on these companies. The first was about the return on Human Capital there's a dramatic difference in valuation between these firms and their non-digital peers. I just added Philips in for reference. Remember that these are all consumer companies and we're mostly B2B/B2G. Still we're doing OK as a non-Digital-Pure Play company.

Facebook and google need only 6 and 8 employees respectively to generate 10Mn in revenue, whereas competing media companies need 65. Amazon only needs 17 people to generate 10Mn compared to other Retailers who need around 50. And Apple can do it with 5, vs other manufacturers, again, I added Philips in and we're doing pretty well

Here's the real eye-opener though, lots of people are leaving packaged goods companies to go to Google, FB and Amazon. Not so many coming back. So if you want to know where the smartest people at P&G are, they're at Google.

For the second study, They also looked at what companies might be next to join the '4 horsemen' based on an eight-piece algorithm. The fifth horseman must have a differentiated product, cheap access to capital, a global consumer-base, a maternal attitude towards employees, inventory control through vertical distribution, they need the ability to track data to specific identities, an aspirational brand that gives people the benefit of feeling better about themselves by associating with it and finally, access to high end technical thinking like a world class engineering university.

Seven companies come close. They are Uber, Alibaba, Starbucks, Linkedin, Tesla, Nike, and Walmart. But none have demonstrated all of the above characteristics. Walmart, Linkedin, and Alibaba don’t have a brand people want to associate with. Starbucks spends more on its employees than on coffee beans, but does not have access to cheap capital. Tesla has a finite consumer base rather than a global one. And although Nike is a prestigious global brand and a fantastic place to work, its product is not all that differentiated from competitors.

Uber was the closest brand to the four horsemen. One million people ride the service every day, which is more than the Chicago CTA or Boston T. At 162,000 drivers, Uber’s employee base is triple that of Delta Airlines. So where does Uber lag in the algorithm? It does not have a maternal attitude towards employees, as it has access to the cheapest source of on-demand labor without unions or health insurance. While that is good for users and the company, it may not be as good for the workers, on the other hand, no one is forced to work for Uber.

But over the next couple of months, I'd like to take a closer look at these potential horsemen. And Today I'm going to zoom in on Nike. Let's look at it via the algorithm. It's the preferred brand of upper income teens. They are the most desireable demographic, the future of wealth, the most influential people in the world. Among the contenders, Nike is by far the number 1 brand. There's a huge shift going on in the fashion industry, it's the shift from Denim to athletic wear (sweat pants). It doesn't seem like a big deal, but it's a techtonic shift in an enormous industry. Fashion is the second largest consumer category in the world. Athletic wear has now overtaken denim for the first time and what company is at the top of the list? Nike by threefold over any of the competitors in a crowded field.

BUT, there’s no real defensible Intellectual Property around their products. They’d have to create something new and tech-related beyond the fuelband that was truly differentiating. Their stock trades at a healthy multiple, but nothing like the digital giants. They need to establish a presence outside Portland where they would have access to world-class engineering talent.

We'll look at another company next month, but till then, let's think about how Philips fits into the algorithm, where we can improve and how we can make it better. Maybe someone would like to spend a couple of minutes plotting where our company is against these 8 elements and present that on our call next month? Please tell me your thoughts about this. Who are your favorite companies? Did L2 miss any good prospects? Let's have a discussion about it in the SocialCast group.