Now that we are several months into the COVID19 pandemic, many companies have gotten over the initial stage of shock.
Many (weak) companies have already declared bankruptcy. Like JC Penney. Like Nieman Marcus. Like J Crew.
But, there’s another side to the coin. As discussed in a recent post, companies with strong balance sheets are not only defensive in periods of stress, but strong balance sheets can be deployed offensively to aggressively box out weaker competitors during periods of stress.
Now that the initial stage of shock is over, armies are in motion.
And very soon, the borders will all be redrawn. Capital Flywheels anticipates that many companies within the Paper Portfolio will see their reach expand significantly as they take advantage of their competitors’ disarray.
A few examples are already starting to shape up…
#1 Uber Bids for Grubhub – Giant in the Making?
Uber Technologies Inc. has made an offer to acquire Grubhub Inc., a move that could combine two of the largest food-delivery apps in the U.S. as the coronavirus drives a surge in demand, according to people familiar with the matter.
Grubhub, founded in 2004, is the oldest of the major food delivery companies in the U.S. In recent years, competition from DoorDash Inc. and Uber has squeezed Grubhub’s profit margins. The coronavirus is adding more pressure, forcing Grubhub to withdraw its 2020 financial guidance last month. Uber pulled its forecast, too, and said a plan to turn a quarterly adjusted profit this year would be delayed until 2021.Source: WSJ
While both companies have withdrawn their forecasts, one has money (Uber) and the other does not (Grubhub). With >$9 billion of cash and availability liquidity, Uber is in a prime position to consolidate their markets.
Food delivery has been a highly unprofitable market because of excessive competition. If successful, a combination of Uber Eats and Grubhub would give Uber Eats dominant share in many US markets, which should finally allow the industry to become profitable. In addition, since Uber is the only multi-service platform in the space, the loyalty they are gaining with users via Eats during shelter-in-place policies will likely draw ride hailing users away from Lyft once cities reopen. I would not be surprised if many Lyft users are currently using Uber Eats for food delivery. These users are building up points via Uber’s loyalty program / wallet.
#2 Amazon Doing What Retail Peers Cannot
The service we provide has never been more critical, and the people doing the frontline work — our employees and all the contractors throughout our supply chain — are counting on us to keep them safe as they do that work. We’re not going to let them down. Providing for customers and protecting employees as this crisis continues for more months is going to take skill, humility, invention, and money. If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small. Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit. But these aren’t normal circumstances. Instead, we expect to spend the entirety of that $4 billion, and perhaps a bit more, on COVID-related expenses getting products to customers and keeping employees safe. This includes investments in personal protective equipment, enhanced cleaning of our facilities, less efficient process paths that better allow for effective social distancing, higher wages for hourly teams, and hundreds of millions to develop our own COVID-19 testing capabilities. There is a lot of uncertainty in the world right now, and the best investment we can make is in the safety and well-being of our hundreds of thousands of employees. I’m confident that our long-term oriented shareowners will understand and embrace our approach, and that in fact they would expect no less.Source: Jeff Bezos / Amazon
While ecommerce allows consumers to shop at a distance, ecommerce still requires physical assets and physical organization of people and goods on backend. Without a vaccine for COVID19, the ability to devote resources to employee safety is important. Amazon is spending $4 billion on these efforts. On the other end, Amazon’s peers are going bankrupt. Macy’s still hanging on but the entire market cap of Macy’s is currently…$1.6 billion. Amazon is going to spend more than 2x Macy’s market cap on employee safety.
#3 Facebook Presses on in its Quest to Own Every Part of Our Lives
Now beyond our immediate plans to help respond to the pandemic, I also want to share some reflections on how we’re planning to run the company during this period. I have always believed that in times of economic downturn, the right thing to do is to keep investing in building the future. And I believe this for a few reasons. First, when the world changes quickly, people have new needs and that means that there are more new things to build. Second, since many big companies will pull back on their investments, there are a lot of things that wouldn’t otherwise get built that we can help deliver. And third, I believe that there is a sense of responsibility and duty to invest in the economic recovery and to provide stability for your community and stakeholders if you have the ability to do so. And we’re in a fortunate position to be able to do this, along with our strong financial position and the important social value our services provide, we’re planning to hire at least 10,000 more people in product and engineering roles this year, so we can continue building and making progress.
Now that said, with advertiser spending less than our business performance below expectations, we do plan to moderate some areas of our expense growth especially in business functions, we accepted that our profit margins will decrease this year as we continue investing, and Dave will share more on our financial outlook in a few minutes. But this economic pullback has certainly reinforced for me the importance of maintaining high margins. Our financial position has allowed us to continue investing and building products and making investments like our partnership with Jio even when the underlying economic conditions are challenging.Source: Facebook 2020 1st Quarter Earnings Call
Mark Zuckerberg gets it. The world is wary of Facebook. The world wants to resist it. But COVID19 is an opening. And this is an opening that Facebook will not let go to waste. Facebook will invest while others cannot.
Interestingly, Google is reducing investments. Although Mark Zuckerberg is not likable, I continue to believe people underestimate just how good of an operator he is. He belongs up there with Jeff Bezos as one of the few CEOs with focus and a military mindset.
#4 Alibaba Cloud Plans to Spend $30 Billion in Capex Over Next 3 Years
Alibaba Cloud announced today that it will invest another RMB 200 billion (or about $28 billion) into its infrastructure over the next three years, prompted in part by increased demand for services like video conferencing and live streaming as businesses adapt to the COVID-19 pandemic.
The investment will focus on expanding Alibaba Cloud’s technology, including its operating system, servers and chips, in its data centers.Source: TechCrunch
This period is forcing everyone online. This is a massive opportunity. Although some companies can make the transition (for example, Walmart or Target), not all companies will be able to fully capture the breadth and scale of the transition. Many enterprises will not be able to invest in private clouds that will allow them to keep up with the pace of online growth. As a result, many enterprises will become ever more dependent on public cloud players like Amazon AWS, Microsoft Azure, Google Cloud, and Alibaba Cloud.
And the reason the public cloud players can meet that demand is because they can invest tens of billions of dollars to keep up.
Strong balance sheets. Offensive balance sheets. And as always, tech infiltrates and then transforms.
Disclosures: I own shares in UBER, FB, and BABA. I have no intention to trade any shares mentioned in the next 48 hours.
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