Target’s growth, Salesforce reportedly about to acquire Slack and Uber vs Lyft

Target’s growth during the pandemic

Writing that 2020 is good for somebody or a company is weird as this year has been nothing, but a disaster. However, from a business perspective, Target has had a pretty good 2020 so far.

Before 2020, its comparable sales growth was often a low or middle single digit. In Q4 2019, its physical store comparable sale growth was even in the negative territory. 2020 flipped the switch. The company’s total comparable sale growth has been in the double digits with Q2 2020 recording the highest at 24%. Digital comparable sales growth is at least 9% or higher. Q3 saw a bit of a decline compared to Q2, but the overall growth was still higher than 20%. I find it interesting that the revenue YoY growth and the store comparable growth seem pretty in sync with each other, but that’s because physical stores make up at least 84% of Target’s revenue. Digital sales was responsible for almost 16% of the overall revenue in Q3 2020, an equivalent of $3.6+ billion in revenue for a quarter and up from 7.5% in the same quarter last year.

In terms of profitability, Q2 and Q3 of 2020 saw the highest gross margin and operating margin in the last 5 years. Operating margin reached 10% and 8.5% in Q2 and Q3 respectively while gross margin was 30.9% and 30.6% in Q2 and Q3. During a year dominated by a once-in-a-lifetime pandemic, Target managed to pivot its business to adapt to the dire situation and improved not only its top line, but also its profitability. That’s proof of resilience and managerial competence.

Source: Target

Another aspect of their business that I find interesting is their branded cards’ penetration. Target measured its credit and debit card’s penetration as percentage of sales that took place on their cards. In other words, if there is about $200 million in sales in a week and $50 million of which is paid through Target’s credit and debit cards, the penetration rate is 25%. And shoppers have a reason to use those cards. Owners of these cards have exclusive benefits that other issuers can hardly match, such as: no annual fee, 5% off on purchases at Target stores and on its website, free 2-day shipping on select items and longer return period. Yet, there has been a slowly steady decline in terms of the RedCard penetration. The penetration rate in Q3 2020 was 21%, down from 23% from the year before. Given the increase in sales and the unique offerings of the RedCards, it’s surprising that the figure not only didn’t grow, but it also contracted. This indicates to me that Target can do much better in getting customers to apply for a RedCard. It is a good retention tool and it brings extra revenue to the company. In Q3 2020, credit card profit sharing was $166 million, but down from $177 in the same period last year.

In short, Target has been doing quite well. They succeeded in growing their online business which has been turbocharged by the pandemic, but that, in no way, means that the company didn’t put in the effort. Think about it this way, every retailer tried to grow its online business, but Target managed to do in a cut-throat industry and at their scale. So credit to them. Plus, they made appropriate and necessary investments in same-day services and deliver. In the last two earning calls, the management reported ridiculous numbers of same-day services’ growth, to the tune of several hundred percentages. Shoppers like options. With Target, they can now order online and have it delivered to their door, or drive up to the parking lot to pick the order up or fetch it in stores. The flexibility is there and it will bode well for Target in the upcoming holiday season that is unfortunately engulfed, still, by the pandemic.

Regarding the possibility of Target having a similar subscription to Walmart+ or Amazon Prime, I think Target is still missing the main hook, the main attraction. Amazon Prime has been around for more than 10 years. Over the years, Amazon kept adding more and more benefits for shoppers so that the subscription now offers a plethora of benefits ranging from unlimited 2-day shipping regardless of order size, movies, music, books, exclusive deals and so on. On Walmart Plus side, Walmart can offer affordable groceries and discount on fuel. Target doesn’t seem to me that it can match any of those benefits. Even though some pieces are there such as Target’s popularity, its network of stores across the country and its delivery flexibility, I don’t see a main selling point for a Target’s own subscription yet. We’ll see.

Salesforce reportedly in talks to buy Slack

Yesterday, after the news broke that Salesforce has been in talks to acquire Slack and a deal can happen next week, Slack’s stock price popped by more than 30% within a day. The reaction that I saw on Twitter was mostly positive for both parties. I can see why. But the fact that investors are happy about this prospect of an acquisition says something about Slack as a standalone business. Slack last reported its active daily user at 12 million back in October 2019. Within the past 12 months, Microsoft revealed the metric at least 3 times: 20 million in Q2 FY 2020, 75 million in Q3 FY 2020 and 115 million last month for Q1 FY 2021. There are two reasons why companies don’t make disclosures: 1/ they are legally obligated not to and 2/ there is nothing rosy to disclose. In this case, it’s squarely the latter case. My guess is that Slack hasn’t seen a meaningful increase in its Daily Active Users (DAU) numbers DESPITE a pandemic that turbocharged working from home, the same way that Microsoft Teams has achieved. In the face of a formidable challenge from Microsoft, Slack initially played it cool. Below was their reaction 6 months ago

“What we’ve seen over the past couple of months is that Teams is not a competitor to Slack,” Butterfield told CNBC in an interview after Microsoft’s Q3 earnings update. Butterfield also downplayed the impact on Slack’s growth caused by Microsoft “bundling [Teams] and giving it away for free” with Office 365 over the past three years. 

Source: ZDNET

Yet, Slack filed a formal complaint to the EU about Microsoft’s alleged anti-competition practice, the same practice that Butterfield downplayed. I wrote here about why that formal complaint is unlikely to succeed. But it shows Slack’s desperation. If Microsoft weren’t a competitor and its bundling practice was nothing, why would Slack sue to stop it? All of these factors and the fact that investors were happy about the prospect of being acquired by Salesforce paint a solemn picture of Slack as a standalone company. If it joins Salesforce, there will likely be a Salesforce bundle that includes Slack, the same way that Microsoft bundles Teams into Office 365. Slack would get more assistance in selling to corporate clients while Salesforce would get extra capabilities quickly without having to build them from scratch.

Uber vs Lyft

The pandemic has been a catastrophe for ride-hailing companies such as Lyft and Uber. According to Second Measure, the market in the US dropped to only half of the 2016 level and only recovered to the 2016 level in October 2020. That’s how big the impact of the pandemic has been on this business. Since Uber and Lyft are always compared to each other, you’d think that their business is faring similarly. Not really.

While Lyft essentially has only one business in ride-sharing, Uber successfully grew its food delivery service UberEats to be a $4.5 run rate business, making up 40% of Uber’s revenue in Q3 2020. Uber Eats’ $1.1 billion in revenue in Q3 2020 was more than double Lyft’s entire revenue in the same period. Additionally, the pandemic affects each other differently. Lyft’s main market is the US, which is, unfortunately, going deeper and deeper into the pandemic. There is no sign of things turned around here in the US, unless there is a vaccine. It severely handicaps Lyft’s business and Uber’s ride-sharing segment. Nonetheless, Covid-19 has been a boon to Uber Eats. It has grown substantially in the past few months and become a silver lining for Uber. Plus, Uber announced its effort to deliver groceries and its acquisition of Postmates indicates that it is serious about becoming a delivery-as-a-service business. In other words, while the two companies are often mentioned in comparison, they are vastly different now, with Uber becoming more of a diversified company. It is more diversified horizontally (more services) and vertically (if you consider being present in more countries). In this environment, I think that the Uber model is a much better one. Don’t take my word for it. Look at the stock prices. The two companies made debut on the stock market almost at the same time. While Uber soared past its IPO price, Lyft is trading nowhere close to its own IPO price.

It’ll be interesting to see how the next couple of years will be for these two companies. Would Lyft venture into another business like Uber did? What would a vaccine bringing back our previous life mean for Uber? Knowing that it would power up the ride-sharing business, but adversely affect the growth of Uber Eats?

As contactless payments become more popular in the US, card issuers should beware of Apple Card

Costs and benefits of a credit card from an issuer perspective

Issuing a credit card is a business and hence, it comes with risks, expenses, revenue and hopefully profits. A credit card issuer’s revenue comes from three main sources: interchange, fees and finance charge. Finance charge is essentially interest income or the interest on outstanding balance that users have unpaid at the end of a cycle. Fees include late fees, cash advance fees or annual fees, just to name a few. Interchange is what an issuer receives from merchants on a transaction basis, according to a rate agreed in advance and usually dictated by networks such as Visa or Mastercard. There are a lot of factors that go into determining what an interchange rate should be, but for a consumer card, it should not be higher than 3% of a transaction’s value.

As an issuer thinks about which credit card product to issue, it needs to balance between the benefits of the card, the expenses and the profitability. For instance, nobody would be $100 in annual fee for a credit card that has a standard 1.5% cash back without any other special benefits. That product wouldn’t sell. Likewise, an issuer would flush money down the toilet if it issued a card with a lot of benefits such as a Chase Sapphire without a mechanism to make money on the other side, like an annual fee. The art of issuing a credit card is to make sure that there is something to hook the users with and a way to make money.

The dynamic between a brand and an issuer in a Cobranded credit card agreement

In addition to having cash back or rewards on generic categories such as Dining, Grocery or Gas, an issuer can appeal to a specific user segment by having a special benefit dedicated to a brand. That’s why you see a Co-branded credit card from Walmart, Southwest, Costco or Scheels. These brands work with an issuer to slap their brand on a credit card. What do the parties in this type of partnership get in return?

From the Brand perspective, it offers to an issuer Marketing Assistance and an exclusive feature to appeal to credit card users. To the fans of Costco, a Costco credit card with 5% cash back; which should be very unique, is an enticing product to consider. Why saying no to extra money when you already shop there every week without it already? Moreover, a Brand can also be responsible for rewards at or outside their properties. For instance, Costco can pay for rewards at Costco stores or on Costco website or purchase outside Costco or the combination of all. It varies from one agreement to another.

From the Issuer perspective, it has to compensate the Brand in the form of Finder Fee, which is a small fee whenever there is a new acquired account or a renewal, and a percentage of purchase volume; which you can consider it a tax. The issuer, of course, has to take care of all the operations related to a credit card such as issuing, marketing, customer service, security, regulatory compliance, fraud, you name it. In return, issuers have an exclusive benefit to appeal to credit card prospects. They will also receive all the revenue, net the compensation to the Brand, as I described in the first section. Therefore, the longer a customer stays with an issuer and the more he or she uses the card, preferably revolves as well, the more profitable it is for the issuer.

BrandIssuer
What to offer– Marketing Assistance & brand appeal
– Rewards
– Finder fee (a fixed fee for every new account and/or a lower fee for every renewal
– In some cases, issuers fund rewards as well
– All operational needs related to a credit card
– A percentage of purchase volume
What to gain– Finder fees
– A tactic to increase customer loyalty
– A percentage of purchase volume from the issuer
– An exclusive feature to appeal to credit card users
– Revenue, net all the compensation to the Brand

Typical credit cards

Based on my observations, there are three main credit card types on the market which I assign names for easier reference further in this article:

  • The Ordinary: cards that have no annual fees, but modest benefits such as 1% or 1.5% cash back on everything. These cards are usually unbranded
  • The Branded: these cards are Co-Branded credit cards that are issued by a bank, but carry a brand of a company. These cards can come with or without an annual fee, but they reward most generously for purchase at the company’s properties, such as 3-5x on every purchase. Then, there is another reward scheme for a generic category such as 2-3x on dining/gas/grocery/travel. Finally, there is a 1x on everything else
  • The Premier: these cards are often accompanied by a high annual fee. To make it worthwhile for users, the issuers of these Cards hand out generous benefits and/or signing bonus. For instance, a Chase Sapphire user can get 60,000 points after spending $4,000 the first 90 days.

All the three types usually work well with mobile wallets and have a delay on when rewards are posted (usually it takes a cycle). This delay isn’t particularly enticing to users because when it comes to benefits, who would want to wait?

Apple Card

Apple Card is a credit card issued by Goldman Sachs and marketed by Apple. The card has no fees whatsoever, but comes with some special features:

  • An expedited application process right from the Wallet app on iPhones
  • Instant cash back in Apple Cash – no delay
  • Native integration with Apple Pay
  • 3% cash back on all Apple purchases
  • 12-month 0% interest payment plan for select Apple products
  • 2% on non-Apple purchases through Apple Pay
  • 1% on non-Apple physical transactions through a chip reader or a swipe

Without the 2% cash back with Apply Pay, Apple Card would very much be for Apple purchases only. But because there is such a feature and Apple Pay is increasingly popular, I think Apple Card should be something that issuers need to beware. Let me explain why

With the increasing popularity of Apple Pay, Apple Card should not be taken light

Last month, the Department of Justice filed an anti-trust lawsuit against Google. Interestingly, the lawsuit said that 60% of mobile devices in the US were iPhones. That says much about how popular Apple’s flagship product is. With the easy application process and the native integration into iPhone and Apple Pay, Apple Card has a direct line to consumers. Once a consumer contemplates buying an Apple product, it’s impossible not to think about getting an Apple Card and reaping all the benefits that come with it. With the existing iPhone users, the extensive media coverage and the marketing prowess of Apple will surely make them aware of Apple Card. Therefore, other issuers are on a back foot when it comes to acquiring customers from iPhone user base. However, most people have multiple cards, so one can argue that this advantage may not mean much. To that, I’ll say: fair enough. Let’s look at other aspects.

If you compare Apple Card to the Ordinary above, Apple Card clearly has an advantage. In addition to the 3% cash back on Apple purchases, there is also 2% cash back on other purchases through Apple Pay, higher than the 1.5% offered by the Ordinary. Granted, Apple Pay’s presence is a requirement, but as more and more merchants and websites use Apple Pay, it’s no longer relevant. It almost becomes a given and this advantage Apple Card has becomes more permanent. Besides, Apple Card has no fees and can issue cash back immediately after transactions are approved, compared to a host of fees and a delay in rewards from the Ordinary.

Between Apple Card and the Branded, it’s harder to tell which has the advantage. It depends on the use cases. For on-partner purchase (purchase on the brand’s properties), Apple Card has no chance here as the reward rate from the Branded is much higher: 3-5x compared to 2x from Apple Card. However, things get trickier when it comes to non on-partner purchase. If a non-on-partner purchase warrants only 1x reward from the Branded, Apple Card has an advantage here as it can offer 2x rewards with Apple Pay. If a non-on-partner purchase warrants 2x reward from the Branded, the question of which card consumers should favor more rests on these factors:

  • How much do consumers care about receiving immediate cash back?
  • Can the transaction in question be paid via Apple Pay?
  • How much are consumers willing to go back and forth in their Apple Pay’s setting?

Between Apple Card and the Premier, the comparison depends on which time frame to look at. Within the first year on book, the Premier should have an advantage. No one should pay $95 for a card and does not have a purchase plan in mind to get the coveted signing bonus. In other words, savvy users should plan a big purchase within the first 90 days to receive thousands of points. In this particular use case, the Premier clearly is the better card. However, it gets trickier after the first year on book. Without a signing bonus, users now have to determine whether it’s worth paying an annual fee any more. The usual benefits from the Premier should be better than Apple Card’s, but the high annual fee and the delay in rewards may tip the cost-benefit analysis scale to a tie or a bit in favor of Apple Card.

Given my arguments above, you can see how Apple Card, provided that Apple Pay becomes mainstream, can become a formidable competitor to issuers. Apple Card may not affect the acquisition much, but it may very well affect the purchase volume and usage of other issuers’ cards, and by extension, profitability because, as I mentioned above, issuers’ revenue come partly from interchange. In other words, Apple Card should not be taken lightly as a gimmick or a toy feature at all.

How popular is Apple Pay?

In Q1 FY 2020, Tim Cook revealed that Apple Pay transactions doubled year over year and reached a run-rate of 15 billion transactions a year. Loup Venture estimated that 95% of the US top retailers and 85% of US retail locations adopted Apple Pay.

According to a research by Pulse, in the US in 2019, there was around $1.3 billion worth of debit transactions through mobile wallet, $1.1 billion of which came through Apple Pay. This level of popularity will leave retailers and merchants with no choice, but to have Apple Pay-enabled readers; which in turn will gradually benefit Apple Card.

Image
Source: Pulse

Disclaimer: I own Apple stocks in my personal portfolio

AirBnb – an outstanding success, one not as great as many thought

AirBnb recently filed its S-1 as an important step before soon going public. Finally, the curtain on one of the household names and one of the most anticipated IPOs is now pulled back a little. The filing is pretty long. I stuck through it, well most of it. Here is what I found

Background

Unless you have lived under a rock for the past 4-5 years, you should be familiar with AirBnb. It’s that website where you can book a spare room, an air mattress in somebody’s house or the entire house for a period of time. In 2007, two of the founders were trying to make more money to cover the expensive living cost in San Francisco. One time, there was a popular conference in town and all the hotels were booked. So they quickly came up with a website that could let people book for an air mattress at their place. The seed for AirBnb was planted on that day. 13 years later, they are on the verge of going public.

The problems AirBnb solves are two fold. 1/ They increase the efficiency of the travel market. Hosts, whether it’s an individual or a professional management company, have spare resources (rooms) that can be exploited while guests can have an alternative choice in addition to traditional hotels, often at a cheaper price. 2/ Trust. Guests come to stay at traditional hotels because they somewhat trust the safety there. Imagine that you are an individual host. How could you trust a stranger enough to let him or her in your apartment, let alone sleeping a few feet away from you? At its core, AirBnb operates as a middle man between hosts and guests, and facilitates the searching and booking of travel products.

Who does AirBnb compete with? Here is the list of competitors AirBnb detailed in the filing

Online travel agencies (“OTAs”), such as Booking Holdings (including the brands Booking.com, KAYAK, Priceline.com, and Agoda.com); Expedia Group (including the brands Expedia, Vrbo, HomeAway, Hotels.com, Orbitz, and Travelocity); Trip.com Group (including the brands Ctrip.com, Trip.com, Qunar, Tongcheng-eLong, and SkyScanner); Meituan Dianping; Fliggy (a subsidiary of Alibaba) Despegar; MakeMyTrip; and other regional OTAs

Internet search engines, such as Google, including its travel search products; Baidu; and other regional search engines;

Listing and meta search websites, such as TripAdvisor, Trivago, Mafengwo, AllTheRooms.com, and Craigslist

Hotel chains, such as Marriott, Hilton, Accor, Wyndham, InterContinental, OYO, and Huazhu, as well as boutique hotel chains and independent hotels

Chinese short-term rental competitors, such as Tujia, Meituan B&B, and Xiaozhu; and

Online platforms offering experiences, such as Viator, GetYourGuide, Klook, Traveloka, and KKDay.

Source: AirBnb ‘s S-1

The order of this list should tell you which AirBnb considers their fiercest rivals. Not only do those incumbent OTAs offer a marketplace for room nights at traditional hotels, but they also have their own homestay marketplace offerings, similar to what AirBnb is. With an esteemed competition like this, how well has AirBnb performed in the past few years?

Incredible growth in the past 5 years

According to the filing, the number of Nights and Experiences (like a virtual cooking session or a tour to a sight nearby) booked grew at a CAGR of 46% from 72 millions in 2015 to 327 millions in 2019. Meanwhile, the gross booking value (the dollar amount of all Nights and Experiences booked) grew 47% every year from around $8 billion in 2015 to $38 billion in 2019. Those are impressive numbers. Put it this way, in the first 9 months of 2020, 6 of which were amid Covid-19, AirBnb booked more Nights and Experiences and dollars than they did in the entire year of 2016. On this note, I wish AirBnb were a bit more transparent. I’d love to see a breakdown of booked room nights and booked Experiences. Booking.com breaks down their bookings for accommodation, flights and car rentals. I don’t see any reason why AirBnb shouldn’t do the same to help investors understand more the dynamics of their business.

Before the pandemic, AirBnb’s revenue grew 51% every year, from $919 million in 2015 to $4.8 billion in 2019. The first 9 months of 2020, despite the deadly Covid-19, saw the company book almost as much revenue as the entire year of 2017. If we look at the take-rate which is the ratio between revenue and gross bookings, it has been flat at around 11-12% every year between 2015 and 2019. The commission in the first 9 months of 2020 is 14%. Given that AirBnb pushed for virtual Experiences during the pandemic and saw their rental bookings demolished, that’s why I argue for more transparency in the way AirBnb reports their numbers. To really understand the dynamics of their business. Even at 14%, it’s still a bit lower than what Booking.com has globally on average at 15%.

Covid presents a massive challenge and a silver lining

Covid-19 is perhaps the biggest and most damaging crisis to the travel industry. AirBnb isn’t immune to it. Bookings (Nights and Experiences Booked) were up 25% and 17% year-over-year in January and February 2020, before the bottom fell off under AirBnb’s feet. Covid-19 hit. Bookings dropped by 114% and 103% in March and April, respectively. The situation recovered as folks travelled more after April, but as of September 2020, bookings were still down 28%. The decline in bookings leads to a drop in revenue in the first 9 months of 2020 of 32% YoY. Operating loss is almost 4 times bigger than the loss of the same period last year. The damage was so devastating that the company even considered not going public this year.

But why do I say that Covid-19 presents a silver lining?

Before Covid-19, AirBnb showed signs of inefficiency. After being profitable in 2018, every cost item as % of revenue increased in 2019, in comparison to 2018, resulting in the company’s operating loss of 10% of revenue. Even though it still suffers loss in 2020 due to a rise in costs, the cost mix is different. What AirBnb expensed in 2020 is mostly related to Covid-19. The growth in G&A, Operations and Product Development is offset by the decline in Marketing expense. Specifically, the company didn’t spend as much money on marketing, particular online ads as it did a year ago. In fact, for the nine months ending on September 30, 2020, only 9% of their traffic came from paid marketing channels. In an interview a few months ago, CEO Brian Chesky revealed that the company had the same booking in the US market in 2020 up to that time as they did in the same period in 2019, despite NO spending on paid marketing, to the tune of a saving of $1 billion.

Despite all the damages Covid-19 has caused the company, the pandemic looks to be an opportunity for AirBnb to recalibrate and refocus. They might have got carried away with expanding too fast without a tight control of the expenses. At least, they now learned that they could still keep the business in a good shape without wasting money on paid marketing. Whether they can apply the same lesson to other expense items remains to be seen, especially when Covid-19 is still engulfing us around the globe.

Source: AirBnb’s S-1

Moving forward, I hope that AirBnb will be more transparent with regard to the breakdown of their online and offline marketing expenses. Booking.com did a very good job on that. They have a specific section dedicated to online marketing spending while AirBnb mixes it with brand marketing; which doesn’t let investors and analysts have a true feel of how much the company spends on paid performance marketing, in comparison to its rivals.

Source: AirBnb’s S-1

Legal threats

Like many other companies, AirBnb has a couple of looming legal threats on the horizon. One significant threat comes from possible restricting local regulations. In their filing, AirBnb wrote:

For example, listings in New York City generated approximately 2% of our revenue in 2019, and when new regulations requiring us to share host data with the city are implemented, our revenue from listings there may be substantially reduced due to the departure from our platform of hosts who do not wish to share their data with the city and related cancellations. A reduction in supply and cancellations could make our platform less attractive to guests, and any reduction in the number of guests could further reduce the number of hosts on our platform.

Source: AirBnb’s S-1

To be honest, I never understand the beef between local authorities and AirBnb. If it’s about tax, then just raise taxes on the company, but I don’t fully support passing regulations that restrict its business and by extension, individual hosts that operate on its platform. Nonetheless, it’s the reality that AirBnb has to deal with. There are a host of legal issues in various forms that AirBnb is encountering. Even though they don’t necessarily threat its existence, it may harm the top and bottom lines.

The second threat comes in the form of a $1.35 billion tax bill. According to AirBnb, they were served in September 2020 with a notice that they would need to pay $1.35 billion in taxes, plus penalties and interest related to their alleged failure to pay enough of their dues in 2013. That figure can amount to 30-33% of total revenue in 2019; which is a significant sum.

My thoughts on AirBnb

AirBnb is a spectacular story in a sense that it opened up a market that had been there before. Before AirBnb, no company had been able to take homestay rentals to the level that it did. Would there have been another company that achieved the same feat? Possible, but the fact and the matter is that it is AirBnb that revolutionized this market and has grown to be a multi-billion dollar company. It warrants nothing but praise and admiration. However, from a financial perspective, the last 18 months haven’t been great. Even before Covid, AirBnb registered a loss while they should have made some profit.

At its core, AirBnb is similar to other OTAs. The difference is that while the incumbent OTAs, the likes of Booking.com and Expedia, rule the world of traditional hotels, AirBnb dominates the homestay world. Yes, the incumbents have their homestay offerings too, but is Vrbo a verb or as popular a noun as AirBnb? Not even close. While the OTA giants are making inroads into AirBnb’s territory, AirBnb also starts to have some hotels listed on their platform. I think in the future AirBnb and OTA giants can co-exist together and thrive in their respective stronghold. AirBnB understands how to manage homestay, but doesn’t have the expertise to deal with hotels, especially chains like Booking.com. On the other hand, OTAs don’t have the brand name in the homestay world like AirBnb nor the expertise.

In the near future, here is what I think will be AirBnb immediate priorities for the next one or two years

  • Recover to the pre-covid level of business. Even after travel is opened up again, it won’t be the same as it was for a while. Would travelers be comfortable in a stranger’s house without knowing if it’s clean enough? How about traveling internationally to somewhere that still struggles with Covid? Would business travel recover fast enough?
  • Deal with the legal challenges as I mentioned above
  • Get used to the scrutiny that comes with being public
  • Keep control of the costs. 2019 wasn’t a great example of cost management. Would AirBnb keep up the lesson it learned during Covid?
  • What’s next for Virtual Experiences?

In short, once travel industry recovers, however much, from this deadly pandemic, AirBnb will no doubt increase its bookings and revenue. I do have some confidence in their adapting to the new style of travel. What they will be more judged on is their profitability and that remains to be seen. 2019 wasn’t great. 2020 so far has been a year of exception because of Covid-19. Their performance on the stock market will be much affected by whether they can stay disciplined with their expenses.

I do want to make a point about my personal experience with AirBnb. The site is helpful, but it is annoying. What bugs me is that AirBnb isn’t upfront with all the fees. Once you settle on a listing for $100/night, by the time you get to the checkout page, it will be already $150/night with service and cleaning fees. It feels like you were duped, cheated or fooled. I’d much rather know all the fees up front, from the very beginning. I do believe that my experience isn’t unique. Many others share the same view on this issue. Hence, I hope AirBnb will fix it soon.

Interesting facts about AirBnb

Besides the main points above, there are a few other statistics that I think are pretty interesting.

  • As of September 2020, AirBnb had 4 million hosts over the world, 55% of who are women and 86% are outside of the US
  • In 2019, 23% of new added hosts were guests first. 50% received a booking within 4 days of becoming available and 75% within 16 days
  • During 2019, 69% of revenue came from repeat guests
  • AirBnb’s debt as of September 2020 stood around $2 billion
  • AirBnb committed to $1.2 billion for a single cloud vendor (AWS, I think) through 2024
  • Twelve months ended September 30, 2020, the average annual earning per host with at least one check-in was $7,900.
  • As of September 30, 2020, 21% of all hosts were Superhosts
  • In 2019, 68% of guests left reviews
  • Chargebacks in the year ended December 31, 2019 and nine months ended September 30, 2020 were $92 and $95 million respectively
  • By my calculation and data provided by AirBnb, their average merchant fee rate was 1.85% in 2019 and 2% in the nine months ended September 30, 2020
  • Nights and Experiences booked in the Top 20 cities made up less than 5% of the total every month
  • Nights and Experiences booked for 28 nights or longer made up between 3.5% and 6% of the total every month
  • As of December 31, 2019, 90% of all hosts were individual and 72% of bookings were with individual hosts. “Of the reviews they received in 2019, 83% of ratings for individual hosts and 75% of ratings for professional hosts were 5-star.”
  • “In 2019, the average number of guests on an Airbnb stay was 3 people, and 77% of nights were booked for entire homes”
  • “14% of nights booked in 2019 and 24% for the nine months ended September 30, 2020 were for long-term stays”

DoorDash picked the perfect time to go public as the business has grown amid Covid-19

DoorDash is a food delivery service which, after receiving an order, will deliver the order to the customer’s door. The service has three main stakeholders: merchants (restaurants), customers who order food and delivery partners whom DoorDash call “Dashers”. The business started in 2013 as three Asian Americans wanted to help local restaurants. The CEO, Tony Xu, migrated to the US at the age of 5 and worked in his mom’s kitchen in his earlier years. It is that background that inspired him to start this business. 7 years later, these entrepreneurs and their team are about to reap the fruits of their labor after the business has grown leaps and bounds and is on the verge of going public. Let’s take a look at how DoorDash makes money

How DoorDash makes money

This is the graphic DoorDash included in its S-1 to explain where its revenue comes from

Source: DoorDash

As you can see, DoorDash generates its revenue from charging customers fees which include typically include delivery and service fees, as well as taking a cut from the merchant side. In 2018, DoorDash introduced DashPass, a subscription that is worth $9.99/month. The subscription will remove per-order delivery fees and reduce service fees for customers. At the same time, DoorDash hopes this subscription will help increase the stickiness of the service and keep the customer churn low.

DoorDash has gone a long way and become increasingly…less unprofitable

According to its S-1 filing, DoorDash grew its market share from 17% in January 2017 to a market-leading 50% in the US in October 2020, besting other contenders such as Uber Eats, Grub Hub and Postmates. Compared to the same period last year, DoorDash tripled its order count and the Marketplace Gross Order Value (dollar amount of all orders) in the quarter ended September 2020. In Q3 2020, the delivery company generated more than $7.2 billion in GOV and received 236 million in total orders. In the last two years, an average order on DoorDash has stayed largely consistent at $30. Since these numbers were recorded after the introduction of DashPass, I wonder what has been the effect of the subscription on the average ticket.

The company grew not only on the top line, but also on the profitability side. Gross margin has steadily increased from 23% in Q1 2019 to a sweet 53% in Q3 2020. Contribution margin, which represents the result when you divide the difference between revenue and variable costs by revenue, went up from -74% in Q1 2019 to 24% in Q3 2020. In other words, for each order, DoorDash didn’t had to spend as much on acquisition and promotion as it had had. In fact, DoorDash reported that existing customers on the platform have increasingly made up the majority of the business, reaching an overwhelming 85% of the total GOV. This is a very good sign for DoorDash as it shows customers love what they sell and stick around more. In business, we often say it costs 5-6 times more to acquire a new customer than to retain one.

While its competitor Uber Eats never sniffs profitability, DoorDash achieved the feat in Q2 2020. While its revenue grew almost 7 times between Q1 2019 and Q3 2020, DoorDash’s operating loss has shrunk 6 times during the same period. To highlight the increased efficiency of the business, Sales & Marketing, which is usually the biggest expense for a multi-sided platform like DoorDash, has been lower than Cost of Revenue for 4 straight quarters through Q3 2020 and stood at 33% in the lastest quarter.

Source: DoorDash

As the business grows, so does DoorDash’s legal trouble. The company spent a few pages only on legal lawsuits, most of which concern its labeling Dashers as independent contractors, instead of full-time employees. The company repeatedly warns investors in its filing about regulations which could adversely harm its business. That’s because if DoorDash has to change its classification, it would mean the company has to pay higher wages and employee benefits. California introduced AB5, a legislation that would force gig economy companies like DoorDash to alter its operating model and classify workers as employees. However, DoorDash got a victory when Californians passed Proposition 22, which essentially stayed AB5. However, I don’t think the legal challenges will end there for DoorDash and they are something that prospective investors should pay attention to.

My thoughts on DoorDash

Clearly, things have been going well for DoorDash. The past few months have seen a substantially positive impact by Covid on the business. More order, more business and higher odds at profitability. Even though DoorDash indicates that their customer base makes up only 6% of the US population, I am pretty doubtful whenever companies cite the Total Addressable Market. First of all, not all the US population will use DoorDash. Second of all, the company has fierce competition from the likes of Uber Eats, Postmates and Grub Hub. I am confident that DoorDash will grow its top line in the next year or two, but the magnitude that the company hints in its filing is not really realistic. On the other hand, DoorDash can grow internationally. The company recently debuted in Canada and Australia. There is no doubt it will make inroads into Uber Eats’ market share, but at the same time it will require more resources from the management.

Recently, we have seen DoorDash strike partnerships that are not food related such as the one with Walgreens to deliver drugs and health products. In the future, I expect to see DoorDash develop to be a delivery platform, not just a food delivery machine. The logic is simple: the more orders there are, the more revenue DoorDash can generate and the happier it can keep customers and drivers. I didn’t see this piece much from the filing, but don’t be surprised if it comes up more in the next couple of years.

Additionally, some people wonder the sustainability of this model as restaurants have to relinquish a significant amount of margin to DoorDash. In the example above, restaurants have to give up 18% ($4 out of 22%) to the delivery service, while it was reported that in some case, the commission could go up to 30%. While it is indeed concerning as some restaurants may resist working with DoorDash and lawmakers may intervene, the fact and the matter is that a commission rate of 15%-20% seems to be the industry standard. Plus, restaurants may find that developing their own delivery muscle and marketing ability won’t be that much cheaper. As we are going through the worst phase of this pandemic so far and the weather is getting colder and colder, diners may favor delivery to in-dining, a huge tailwind for DoorDash.

Some interesting facts from DoorDash’s S-1

  • Dashers’ age ranges from 18 to 55. 45% of Dashers are women
  • As of September 30, 2020, there are 5 million DashPass subscribers
  • DoorDash has 390,000 merchants, 18 million customers and 1 million Dashers on its platform
  • “In 2019 alone, merchants as a whole experienced 59% year-over-year same store sales growth”
  • DoorDash’s list of 3rd party partners include AWS, Stripe, Salesforce, Twilio, Wavefront, Snowflake, Olo, Salesforce, Twilio, Wavefront, Snowflake, Olo and Google Maps

Apple – a 4th quarter unlike others and a year impacted by Covid

A different Q4 than others

Apple recorded around $64.7 billion in revenue, a tad higher than they did in the same period last year, and gross margin of 38.2%, 50 basis points higher than Q4 FY2019. Operating income came in at $14.8 billion due to an increase in Operating Expenses. While the increase in revenue is modest, the underlying story between this quarter and Q4 FY 2019 is very different. First of all, we are still in the middle of the pandemic which forces changes in consumer behavior. Students or office workers may spend more on hardware to aid remote working or learning. Consumers may increase consumption of digital content and services more while in isolation for a long time. Secondly, Covid-19 also forced Apple to close some of its stores; which might have adversely impacted sales. Thirdly, Apple didn’t have a new iPhone like it did with iPhone 11 last year; which is a significant element to keep in mind while comparing the two fourth quarters. About 2 weeks of sale for a highly anticipated like a new iPhone is a big deal. Apple executives gave some color on it:

 While COVID-19 and social distancing measures impacted store operations in a significant manner, demand for iPhone remained very strong. In fact, through mid-September, customer demand for our current product lineup grew double digits and was well above our expectations – Luca Maestri

If you look at China and look at last quarters — I’ll talk about both last quarter and this quarter a bit. Last quarter, what we saw was our non-iPhone business was up strong double digit for the full quarter. And then if you look at iPhone and you look at it in 2 parts: one, pre-mid-September, which is pre the point at which the previous year we would have launched iPhones, that, that period of time, which was the bulk of the quarter, iPhone was growing from a customer demand point of view. And of course, the — not shipping new iPhones for the last 2 weeks of September makes that number in the aggregate a negative.  – Tim Cook

Source: Apple Q4 FY 2020 Earning Call

While I understand the story here; folks didn’t want to buy a new phone in the last two weeks of September until after iPhone 12 came out, I wonder why both Tim and Luca kept emphasizing the growth of iPhone in terms of demand, not sale. Perhaps, I am being too paranoid, but I wonder if that specific call-out implied there is a difference in demand and sale or, in other words, there is a supply constraint.

Because of the reasons given above, it’s not easy to draw a conclusion on the two fourth quarters. It’s unclear how much the factors canceled out one another, but I have a feeling that not having a new iPhone for 2 weeks is the larger force at play here. Hence, I think it’s positive for Apple to exceed the sale last year without an iPhone. But what made up the absence of the new iPhones and a bit more?

Even though iPhone sale dropped by 21% in Q4 FY2020, non-iPhone sale grew by 30% with an excellent performance from Mac, which reached an all time high revenue of $9 billion and 29% growth, and iPad, which grew by 46% YoY. According to Apple, Mac grew by double digits in every geographic segment and notched all-time revenue records in Americas and Asia Pacific. Meanwhile, iPad had the best September quarter in 8 years in spite of supply restrictions and also saw double digits from every segment like Mac. Additionally, Services had a nice quarter as well with $14.5 billion, up 16% from the same period last year with all time records in App Store, cloud services, Music, advertising, payment services and AppleCare.

Source: Apple

In terms of geographic segments, all segments, except China, grew year over year. The absence of a new iPhone, like Tim Cook said, impacted sales in China more than other regions as last year, iPhone made up a higher percentage of sales in China than in other regions. Another reason, according to Tim as well, is a drawdown from the channel side. However, Apple is very bullish on the prospect of iPhone 12 in China because of 5G’s popularity and the fact that Apple is arguably the only major phone manufacturer without a 5G-enabled phone.

On the subscription side, Apple reported 585 million paid subscriptions in total, a sequential increase of 35 million from the previous quarter. For the last 3 years, that has been a sequential increase from one quarter to another. At this rate, it won’t be an issue for the Cupertino-based company to reach its goal of 600 million subscriptions by the end of the calendar year 2020. With the introduction of Apple One on Thursday and the imminent advent of Apple Fitness+, it’ll be interesting to see how they will impact the subscription base. There is no doubt that it will go up, but how fast it will reach the 1 billion mark remains to be seen. My guess is 3-4 years, at the earliest.

Source: Disclosures from Apple

How did Apple perform after a year full of challenges?

Apple spent at least half of the last fiscal year in the middle of a once-in-a-lifetime pandemic that brought both headwinds and tailwinds. On one hand, there was more demand for iPad & Mac to enable remote working as well as for possibly Apple TV+, Games and Music. On the other, there were supply constraints and forced store closings. Given all the ramifications of Covid-19 and the absence of a new flagship iPhone, Apple still managed to pull in $274 billion in revenue in FY2020, up 6% from last year. Gross margin increased by 50 basis points to 38.2%, due to a bigger percentage of revenue from Services. Operating margin dropped slightly by 40 basis points to 24.14% because of higher expenses. Next year, my expectation is that gross margin will decrease marginally while operating margin will remain flat because 1/ the new iPhone 12s will be available for order; which will bring a lower gross margin than Services and 2/ the new subscription bundles should also adversely impact gross margin.

Looking at Apple’s segment breakdown, iPhone sale unsurprisingly decreased by 3% YoY while non-Phone sale (Mac, iPad and Wearables) rose by 16%. Individually, Mac grew by 11%, a substantial step-up from 2% YoY growth last year, while iPad grew also by 11% and Wearables by 25%. Apple gave a bit more color on the performance:

  • Mac sale increased due to primarily higher sale of Mac Book Pro
  • iPad sale grew due to “higher net sales of 10-inch versions of iPad, iPad Air and iPad Pro”
  • Wearables sale grew “due primarily to higher net sales of AirPods and Apple Watch”. Because this segment also includes Apple TV, Homepod, iPod touch, Beats products and Accessories (like keyboard, Magic Mouse or cables), this disclosure means that last year wasn’t particularly a good year for Apple TV and Homepod. It’ll be interesting to see how the new Homepod Mini will perform in the future.

The changes in Services really caught my attention. Services brought in almost $54 billion in FY2020, up 16% YoY, “due primarily to higher net sales from the App Store, advertising and cloud services”. The color given by Apple this year differed a bit from last year’s when the increase in Services sale came mainly from App Store, Licensing and Apple Care. The difference, I suspect, came more from the impact of Covid-19 which forced some store closings and hurt AppleCare, than from an increase in demand for iCloud. When comparing the language Apple used to describe their Services segment, two points stood out for me

202020192018
Services’ main components– Advertising
– AppleCare
– Cloud Services (iCloud)
– Digital Content
– Payment Services (Apple Pay, Apple Card)
– Advertising
– Apple Care
– iCloud
– Digital Content
– Other services (Apple Arcade, Apple News+, Apple Pay, Apple Card)
– Digital Content and Services (which doesn’t include any language on licensing)
– iCloud
– Apple Care
– Apple Pay
How Apple broke down Services in their Business segment included in Annual Reports in 2018, 2019 and 2020
  • Advertising, which may include the deal with Google, was called out more prominently in 2019 and 2020. Perhaps, it’s because the payment from Google is substantial enough for it to have its own section
  • The new Payment Services now has its own section which I suspect will be the case moving forward. Tim Cook already said it’s an area of great interest to Apple, though they haven’t made public any more updates on either Apple Pay or Apple Card for a while

From the geographic segment perspective, 2020 was a good year for Americas, Asia Pacific and Europe as those segment booked all-time records while Japan stayed largely flat for the past three years and China had the lowest revenue since at least 2015. In fact, China’s revenue as % of total revenue came down from 20% in 2018 to less than 15% in 2020 while Europe was responsible for one fourth of Apple’s total revenue, up from 23% in 2018. With the new 5G-enabled iPhone 12 that suits Chinese consumers well, this segment’s revenue may likely increase considerably in the upcoming fiscal year.

In terms of operating margin, Japan led the way consistently at 43% while Americas, the biggest market for Apple, lagged behind other segments. China’s operating segment has been steadily improving and has now the second highest operating margin, behind only Japan. Because Apple didn’t give any explanation on the difference in operating margin across segments, I suspect that the reason why Americas’ is low is because of introductory offers from services such as Apple TV+, Apple Card, including sign-up bonuses, investment in content and installment plans for purchases with Apple Card, which is available to only consumers in America.

From a market distribution standpoint, Apple has been steadily increasing its direct share, growing it from 28% in 2017 to 34% of total revenue in 2020. I would imagine that a direct sale through its stores and website carry a higher gross margin than through a 3rd-party supplier. However, given that Apple didn’t particularly offer enough information and that Apple has 0% interest payment plan in America for customers with Apple Card through its stores and website, it’s challenging to gauge the specific impact of this transition. Nonetheless, because America’s operating margin and the company’s stayed largely flat, the more emphasis on direct channels may mean more in terms of customer relationships than in margin.

All in all, here are my take-aways from looking at Apple’s latest 10Q and 10K

  • Non-iPhone businesses have a bright outlook. Mac and iPad booked a strong 4th quarter, are well-liked and with a high probability, will continue to enjoy the tailwind of remote working trend. Wearables will continue to grow. I love my Apple Watch and Airpods Pro and anyone I know who bought these products says the same thing. The fact that Wearables is now the size of a Fortune 130 company after only 5 years on the market is incredible. The thing with Apple is that they tend to have a knack for offering incremental improvements that work well for consumers while keeping the prices largely on the same level. Because of that, I have confidence that Wearables will continue to grow in the near future.
  • iPhone is no longer responsible for half of Apple’s revenue like it used to in the past. Regardless, it’s still a popular phone. Just look at how people follow closely every announcement, from hardware to software, and how folks share their homescreen designs with iOS14, something that Android has had for a long time. Because I live in the US where 5G infrastructure isn’t really well built, it’s hard to see how iPhone 12 will sell. Personally, I wouldn’t buy iPhone 12. There is not enough motivation to upgrade from 11 to 12. Even Apple executives were pretty guarded when it came to giving colors on the new phones. On the other hand, iPhone 12 may become a hit in China, especially with the 5G infrastructure they have over there.
  • Services is now bigger than Mac and iPad combined and grew at a clip of 16% in the last two years. The key drivers of that growth look set to remain strong in the near future: 1/ Apple Care, which rides along with Apple’s popular products, 2/ App Store & iCloud and 3/ Advertising which seems to be made up largely of the deal with Google. Even though that deal is under scrutiny, it’s unclear whether Apple will lose that lucrative advertising money. Even if it does, there will be other browsers ready to jump in, albeit at a lower value. The breadth of Apple’s services keeps growing with Apple One and Apple Fitness+, and presence in more geographical markets. Hence, I expect Services to keep growing at 15-16% a year in the next two years.

Disclaimer: I own Apple stocks in my personal portfolio.

Though AWS slowed in growth, Amazon didn’t

Amazon continues to amaze me with another blow-out quarter in Q3 FY2020. Their total net sales increased by 37% compared to the same period a year ago, reaching $96 billion, while Operating Income increased by 96% from $3.2 billion in Q3 FY2019 to $6.2 billion this quarter. It’s an extraordinary growth for a company that generated more than $1 billion a day in net sales this quarter. Their gross margin in general didn’t change much from a year ago, but their operating margin increased by almost 200 basis points from 4.5% in Q3 2019 to 6.4% in Q3 FY2020. While the high level margin doesn’t look impressive, the devils are in the details if we look closer at their segments.

If we look at Norther America, International and AWS, all three were profitable this quarter with International, traditionally a money loser, being in the black for the second quarter in a row. AWS continues to be responsible for most of Amazon’s operating income as it carries a sweet 30% operating margin, compared to a meagre low single-digit from the other segments. Interestingly, AWS’s growth was the slowest among the three segments, recorded at 29%, compared to 39% of North America and 37% of International.

Source: Amazon

If we look at the results at a deeper level, specifically at the breakdowns into Online Stores, Physical Stores, AWS, 3rd party marketplace, Advertising and Subscriptions, the only area with negative growth in revenue is Physical Stores. 3rd party marketplace, Advertising and Online Stores notched the biggest growth, in that order, followed by Subscriptions and AWS. Regarding Subscriptions, Amazon reported that Prime now has 150 million subscribers with the service coming to its 20th country in Turkey.

Internationally, the number of Prime members who stream Prime Video grew by more than 80% year-over-year in the third quarter, and international customers more than doubled the hours of content they watched on Prime Video compared to last year.

Source: Amazon Q3 FY 2020

Even though Amazon is the master of operating at scale, innovating and squeezing efficiency from every step, I do think the expansion of Prime internationally helps with the increased performance of the International segment which has been profitable in two consecutive quarters. Of course, the decision makers at Amazon have data to see which markets can be improved by launching a high-margin subscription that makes customers stick around longer and shop more. So I wouldn’t surprised if Prime played a role in bolstering the profitability of Amazon’s International segment. So far, there are only 20 countries where Amazon Prime is available. When that number gets bigger, I predict that Amazon will be even bigger and more profitable than it already is; which is both admirable and scary.

When it comes to Amazon, advertising is unlikely the top 3 or 5 services that come to mind. Nonetheless, the segment brought in almost $5.4 billion this quarter, at the growth rate of a whopping 51%. To put that in consideration, neither Pinterest, Twitter nor Snapchat recorded even $1 billion in revenue in the most recent quarter (all of these companies reported results this month). Even Microsoft’s search advertising revenue this quarter was at only $1.8 billion, down from about $2 billion from the year before. As Amazon has an excellent relationship with customers (in general) and customers, when searching, already have intention to buy, this advertising business will not stop here. In fact, I do think it will continue to grow nicely in the future. A short while ago, I wrote about Amazon Shopper Panel, a new initiative by Amazon. The service will compensate shoppers if they send the company 10 eligible non-Amazon at-store receipts every month. This initiative, if done well, will empower Amazon with an unparalleled understanding of consumers, down to even the line items of a receipt. This understanding will bolster their advertising machine even more.

Source: Amazon

Amazon admitted that 2020 has been a big year for capital investments. The company aims to grow its fulfillment and logistics network by 50%, plowing around $12-13 billion in CAPEX this quarter or over $30 billion so far in 2020. That is an extraordinary amount of money allocated in growing assets. Not many companies even have that kind of numbers in revenue, let alone CAPEX. On top of that, Amazon reported that its shipping costs reached $15 billion this quarter. Fulfillment and shipping are hard as they are resource-intensive and require a mastery in operations to achieve the necessary efficiency. Any competitor that wishes to challenge Amazon needs to have a pocket deep enough to absorb these expenses; which constitutes a competitive advantage for the biggest e-Commerce player in the US. In the end, how many companies in the world could claim they generated $55 billion in trailing 12-month (TTM) Operating Cash Flow or $29 billion in trailing 12-month free cash flow?

In short, the business looks to be in a fantastic shape with amazing growth at a massive scale. Plus, there is plenty of room to grow for Amazon in the future with International expansion, Prime in more markets and advertising. Jeff Bezos is now a $200 billion man. I won’t be surprised if he reaches $300 billion in net worth in the future.

Amazon Shopper Panel – Amazon’s latest big bold move

Yesterday, Amazon announced a new initiative called Amazon Shopper Panel, which I think can have major ramifications for the company moving forward. Amazon Shopper Panel (ASP) is an opt-in and invite-only program in which participants can earn rewards by sending at least 10 eligible receipts a month to Amazon. To be eligible, receipts have to come from non-Amazon purchases, excluding even transactions at Whole Foods, Amazon Books or Amazon Go. There is no language on the minimum value that a receipt has to reach to be eligible. If a participant successfully sends 10 receipts to Amazon in a month, he or she can earn $10 in Amazon Balance or as a donation to a charity organization of their choosing. ASP’s participants can opt out at any time and delete previously posted receipts. In addition, participants can earn more rewards by completing surveys. There are few disclosures on what the surveys will be about and how much responders will earn for each survey. But my guess is that they will be aiding Amazon to complete a shopper’s profile with demographic information.

In my opinion, this is a consequential move for Amazon for the following reasons

Build an unmatched shopper database

As a retailer, one of the biggest challenges is to understand who your customers are and what they do outside of what transpires between you and them. If you are a Target shopper holding a Target-branded credit card, all they know about you is what takes place on Target’s website and between Target’s store walls. With some effort, Target may work with their credit card issuer to understand a bit about your spending behavior on your credit card. Unfortunately for Target, they have no idea on other parts of your consumer life and what you do. And you can bet that they want to know!

By compiling and analyzing receipts on a regular basis, Amazon can build a powerful and formidable database. Receipts carry a lot of information. Not only do they tell where you shop, when, how much you pay, how you pay and the frequency, but receipts also reveal what you buy down to an item level. Essentially, Amazon can theoretically know what vegetables, fruits or milk you buy every week. Normally, retailers can at best gather data down to a merchant level such as Walmart or Target. However, I don’t know of any retailer in the US that can basically gather intelligence down to that level of details.

Enable more sale on Amazon.com and Amazon’s private labels

The first application would obviously be to increase sale on Amazon.com, specifically the sale of Amazon’s higher-margin private labels. The intelligence Amazon gathers from ASP can help them decide which products can be produced as private labels, which can be marketed to whom and at what time. Information is worth as much, if not more, than money. Amazon operates at a scale that even a good idea or a degree of increased efficiency can mean millions of dollars.

Their Amazon Basics brand now has 3,000 SKUs.

Improve their ads business

Though small as a component of Amazon’s revenue, advertising is now a business with $20+ billion annual run rate and the latest YoY growth of 41% (as of Q2 FY2020). Advertisers like ads on Amazon because Amazon shoppers already have intention to buy, something that is lacking on Facebook and Google. When you search for something on Google or scroll down your Facebook Newsfeed, the intention to buy isn’t always there. However, if you go to Amazon, it’s likely that you will end up with an order and that’s what advertisers want. Though impressions are great, advertisers prefer much more hard cash coming from new purchases.

ASP gives the strongest and most reliable signal as to what shoppers are willing to pay for down to the item level, how much and when. Sophisticated and powerful as Facebook and Google are, they don’t have a system in place to know what shoppers buy in store. On the other hand, Amazon would be in a unique position to help advertisers place an ads to the right audience with the right message and at the right time. And to charge a little premium on that service as well. An expansion in advertising means an expansion for both revenue and gross margin for Amazon as this segment is surely more profitable than their online store.

Closing

The understanding of consumer behavior in physical stores carries a lot of value and offers potentially great applications. I am confident that somewhere some smart heads at Amazon already came up with more use cases than what I laid out above. Moreover, this kind of capability is pretty hard to emulate. To gain the intelligence that Amazon hopes to achieve, a company needs to have financial and technical resources that Amazon possesses. Having photos of receipts is one thing. Parsing out information and turning that into actionable intelligence is a completely different matter. while this move may raise red flags for privacy concerns, it’s a shrewd business move. In my opinion, there’s no better way to create a moat in retail than building up a deep understanding of consumers and leveraging your size, technical and financial advantages. I, for one, look forward to what this move will bring about.

Disclosure: I own Amazon stocks in my portfolio.

Apple Card grew balance by $1 billion in 3 months, up 50% from June 2020

Apple Card’s balance grew by $1 billion (50%) in 3 months

Back in July, Goldman Sachs, the issuing bank for Apple Card, reported this in its Q2 earnings call:

Funded consumer loan balances remained stable at roughly $7 billion, of which approximately $5 billion were from Marcus loans and $2 billion from Apple Card

Source: Seeking Alpha

Three months later, the bank said this on its Q3 earnings call this month:

Funded consumer loan balances remained stable at $7 billion, of which approximately $4 billion were from Marcus loans and $3 billion from Apple Card.

Source: Seeking Alpha

My best guess is that the figures for Q2 and Q3 were likely as of the end of June and September. In the banking world, we call them month-end balance. Both Goldman Sachs and Apple have been very tight-lipped about Apple Card. There is very little information and data publicly revealed by either party. With that being said, I do think that it’s positive for Apple and Goldman Sachs to increase month-end balance in 3 months’ time.

There are two ways that this could possibly happen. 1/ The existing accounts in the portfolio saw more usage and a higher accrue of balance and 2/ the portfolio expanded with new accounts and its balance increased. Because we are still struggling in a once-in-a-lifetime pandemic, scenario #1 seems less likely to me. Even if the portfolio’s size stayed the same in September as it did in June, the increase in balance would be much lower than 50% as we see here. Hence, it’s my belief that Apple Card portfolio has expanded and as a result, so has the balance. It’s worth pointing out that since the number of accounts likely increased yet there is no official reporting on it, we don’t really know if the average balance per account really went up from June to September. Nonetheless, a higher balance means:

  • More accounts were opened
  • Accounts were used more, leading to an increase of balance
  • Customers are more likely to revolve, resulting in interest income for Goldman Sachs

Last year, Apple announced a payment plan for iPhones with 0% interest for 24 months. In June 2020, the payment plan expanded to include other product lines:

It’s not a stretch to see that these financing options contribute to the increase in balance of Apple Card portfolio. From Goldman Sachs and Apple’s perspective, they would prefer cardholders to make purchases outside Apple, but because there is little information officially revealed, there is no way to dissect how the portfolio is really performing.

At $3 billion in balance as of September 2020, Apple Card portfolio has so much room to grow. Based on outstanding balance, it’s quite small, compared to other issuers, though it’s unclear whether these portfolios are strictly in the US only

  • Chase: $122 billion in balance for consumer credit card as of Q3 2020.
  • Capital One: $12 billion in balance for consumer credit card as of Q2 2020.
  • Discover: $70 billion in balance for consumer credit card as of Q2 2020
  • Wells Fargo: $36 billion in balance for consumer credit card as of Q3 2020

A persistent and lucrative clientele for Goldman Sachs

I wrote a bit about the partnership between Apple and Goldman Sachs on Apple Card here before. Now I want to add a couple of more points to the conversation.

Apple users are enduring and lucrative. Once a person becomes an Apple user, he or she likely stays in the ecosystem and buys more products and services, as proven by Apple’s financials and analyst estimates. As of Q3 2020, Apple’s Wearables made up 11% of Apple’s total revenue and was the fastest growing segment in FY2020. Apple reported over 550 million subscriptions, up by 130 million from a year ago. With the introduction of Apple One and Apple Fitness+, that figure will likely go up even higher in the near future. Once an iPhone-reliant company, Apple now finds a robust source of revenue from Services, which was responsible for 22% of the company’s top line in Q3 FY2020.

Moreover, Neil Cybart, a prominent Apple analyst and the owner of Above Avalon, reported that nearly half of Apple users owned only one device: iPhone. He also estimated that only 35% of iPhone users in the US wear an Apple Watch. These estimates indicate that more Apple users will buy addition products on top of their iPhones and become engaged at a higher level in the ecosystem.

There is no credit card that offers 3% cash back AND interest-free financing options for Apple products and services like Apple Card. Hence, Goldman Sachs has a unique access to a lucrative clientele that

  • Tends to be sticky and loyal to Apple
  • Buys new expensive Apple products regularly on a few-year basis
  • Uses their Apple Cards monthly with their service subscriptions. Working in the credit card world, I can tell you that having users engaged and actively use cards every month is one of the major concerns for issuers. With Apple subscriptions and an expanding base, albeit as small as $3 per month for iCloud, Goldman Sachs likely will get a good number of active accounts with consistent spending every month, without any acquisition expenses.

Future opportunities

At first, there were only exclusive deals with 3% cash back from Uber, Uber Eats, Walgreen, Duane Reader and T-Mobile. Since then, Apple Card has welcomed to the fold Nike in November 2019, Exxon Mobil in June 2020 and Panera in August 2020. Additionally, Apple began to have acquisition bonus campaigns for Apple Card this year. A few months ago, there was a $50 bonus for every new Apple Card user with a minimum $50 purchase at Walgreen. Just a few days ago, it was reported that there is now a $75 bonus for new Apple Card users with a qualifying purchase at Nike. The more exclusive deals like these are, the more likely consumers will use Apple Card outside of Apple. And there is no reason to believe that they won’t add new partners or have acquisition campaigns in the future.

Besides Apple Card, Apple has been consistently and regularly promoting the use of Apple Pay with ad-hoc deals such as 15% off with American Eagle in October 2020, 50% off with Snapfish in July 2020 or 30% off with Rayban in May 2020. There is no data on how many Apple Pay accounts are paired with Apple Cards. But given the fact that users can only earn 2% Apple Cash from every Apple Pay transaction by using Apple Card, I won’t surprise me that Apple Pay promotions indirectly benefit Apple Card and Goldman Sachs.

There are rumors of new Apple products in the works such as Air Tags, Airpods Studio or Apple AR glasses. The more products and resulting services there are, the better the future outlook will be for Apple Card.

Disclosure: I own Apple stocks in my personal portfolio.

Section 230 – The Failure of Facebook and Twitter

You must have heard lawmakers rage about Section 230 and their threats to revoke the protection for Internet companies unless the companies stop alleged biases against their respective bases. Today, I want to share some of my thoughts on the law, what has happened around it and what I consider a failure by Internet companies, specifically Facebook and Twitter, to live up to their responsibilities. Frankly, it’s a highly complicated matter and I am no lawyer, but I just lay out what I read and thought for myself. Have a read, but form your own opinions . First off, have a look at what Section 230 text actually says. Here is the piece that matters the most:

(1)Treatment of publisher or speaker

No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.

(2)Civil liabilityNo provider or user of an interactive computer service shall be held liable on account of—

(A)any action voluntarily taken in good faith to restrict access to or availability of material that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable, whether or not such material is constitutionally protected; or

(B)any action taken to enable or make available to information content providers or others the technical means to restrict access to material described in paragraph (1)

The term “information content provider” means any person or entity that is responsible, in whole or in part, for the creation or development of information provided through the Internet or any other interactive computer service.

Source: Cornell

From a service provider perspective, what I understand from the text is that companies such as Facebook or Twitter cannot be held liable for user-generated content on their platforms, unless it is the companies themselves that create the content in question. It is also very important that the text of Section 230 exempts service providers from liabilities for content moderation efforts, whether it’s the technical means to content (user accounts) or censoring/take-down of the content itself.

This protection given to service providers is particularly helpful in growing the Internet. From a personal point of view, I have benefited greatly from content sharing by a 3rd party. I have learned a lot from things shared on Twitter by folks other than the content originators themselves and I believe others do too. Were Internet users made reluctant to share content because of the removal of Section 230, the Net wouldn’t be as great as it is right now. From a company perspective, Section 230’s protection enables the building of platforms without investing heavily in content moderation to avoid possible litigation that would happen due to frivolous lawsuits. Imagine that you are an aspiring entrepreneur that wants to build a small forum dedicated to basketball by yourself and with your modest saving, yet has to shoulder legal expenses because some guys sue you for not taking down offensive comments.

While content sharing has its own benefits, it does also have downsides as we now allow the worst, the dishonest and the ones with a harmful agenda to inflict harms on others. In this case, it falls onto service providers to moderate content. Having millions, if not billions, of users, Twitter and Facebook are prime destinations for actors that want to disseminate false and harmful information. Bafflingly, even though the law specifically shields them from legal liabilities for content moderation and they have the resources to conduct the moderation, Facebook and Twitter still fail to do their duties. For instance, when Trump posted false, dangerous and disparaging information on Twitter, the social network labeled his posts, but still kept them on site because according to Twitter, it’s in the public interest to do so. If the point was to let the public know that the President of the United States lied, distributed propaganda and conducted online harassment, it would be sufficient to simply say so and take down the harmful content. Twitter didn’t remove mostly what Trump said because they were afraid of the wrath from Republicans and they didn’t want to lose a significant portion of the user base.

In many cases, Facebook didn’t live up to their duties for keeping their platform safe for users, either. But in the case of Facebook, the reason remains to be seen, whether it’s financially motivated or Mark Zuckerberg is concerned about the political blowback or he actually prioritizes what he considers “free speech”.

While Section 230 isn’t perfect and leaves much to be desired, calling for a revoke of the law, in my mind, inflicts damages to free speech and 1st Amendment. What it needs is an upgrade and revisions designed to solve the shortcomings of Section 230. Sadly, what has transpired is nothing but. Trump signed an executive order that essentially would strip Twitter of Section 230 protection because it labeled his Tweets as harmful and hid them. Senator Hawley introduced a legislation that would require big tech companies to be content neutral, a definition that would be determined by a panel of five FTC commissioners. If a company is deemed to have politically biased content by two commissioners, it will lose Section 230 protection. The problem is that FTC commissioners can be political appointees and as a consequence, there is no guarantee their assessments are not biased. The legislation would create disastrous downstream effects.

Danielle Citron, a law professor at the University of Maryland, proposed a seemingly vague revision to Section 230, which states that “immunity is only available to platforms that take “reasonable steps to prevent or address unlawful uses of its services.”” The specific definition of reasonable will be left up to the courts. While such a suggestion has its upside, the problem again is that the judicial system in the US has been increasingly politicized. As of this writing, there is a huge battle with regard to the appointment of a Supreme Court and a discussion over court packing. Politically appointed judges can’t guarantee fair rulings any more.

In defense of big tech companies like Facebook or Twitter, moderating content for millions of users with different philosophies in complicated matters is no easy feat. It’s labor intensive and expensive, and even with immense investments, it’s highly challenging to cover endless scenarios that can happen in real life. Moreover, political pressure is also a legitimate threat to their business. With that being said, I still stand by my criticisms because:

  • These companies are still benefiting from Section 230 protection, yet they fail their responsibilities to moderate content sufficiently.
  • They have enough financial resources to invest more in content moderation or lobbying for a more fair Congress

With great power come great responsibilities. Facebook and Twitter have millions, if not billions of users. They wield enormous power, yet they are failing us in their responsibilities. I wish they fought in this issue as hard as they did in the issue of immigration.

Weekly readings – 10th October 2020

What I wrote

Please vote!

Ableist culture

Business

Apparently, Airlines’ loyalty programs are highly coveted and valued

How Singapore’s Sea is surfing Southeast Asia’s digital wave

Insider story on Mackenzie Scott, an author and a reclusive $60-billion woman

A deeper look inside the airline industry. It’s true that this is an extremely tough industry to be in with high capital intensiveness. But looking at it from another angle, can we afford not flying any more? If you open a local restaurant, you may have a new competitor the day after. The chance of such a phenomenon happening in the airline industry is slim to none. There are always two sides of a coin.

Venmo announced its first credit card. The concept of tailoring the highest cash back rate to the highest spending category is pretty interesting

Goldman Sachs and Moody forecast that a Biden administration would be better for the economy and the Americans

A great interview with Daniel Elk on leadership, management and decision-making process

Technology

Additional steps that Twitter is taking ahead of the election

What I found interesting

A very damning account of how this country failed a lot of people. You can’t deny that the US has a problem when it has a man worth $200 billion while there are a lot of men like the guy in this article

A sad story on how the eviction system fails citizens in DC

A study on the brand intimacy of the top brands in the US. Amazon, Disney and Apple lead the way

Furthermore, there is good reason to believe that our limited progress in fighting the COVID-19 virus has at least partially caused our continuing high unemployment rate. Had we been as successful in each measure as the other OECD countries, nearly nine million more Americans would be employed and over 100,000 would still be alive.

Source: Brookings Institution

A study on Gen Z

Source: Zebra