Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

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November 22, 2020

Microchips make way for molecules & Airbnb makes its entrance

Covid’s legacy & an update on the internet of things, those things being drugs, money, lodging and wine.


When we were in the first lockdown earlier in the year it occurred to me there would be some silver linings to this unprecedented period of social and economic upheaval. The Black Death which wiped out a significant proportion of Europe’s population led to higher wages, a loosening of religious authority and created the conditions for the reformation, the renaissance and ultimately the agrarian and industrial revolutions. The Spanish flu’s impact on the returning soldiers from the Great War was a positive precursor to women’s rights. So what can Covid 19 do for us? This pandemic has mainly be seen as an accelerant rather than an agent for fundamental change. Zoom already existed prior to Covid, so did Amazon and Just Eat.


The area of greatest incremental resource allocation has been to target the Covid19 virus itself. In March to May, we were all fed daily updates on the state of supply of ventilators and PPE to the health system. We all lived the story of the the RAF transport planes sent to Turkey to pick up the last source of these scarce garments in the world. Every business in the country was seemingly involved in either the supply of PPE or building a new low cost ventilator, and the government was happy to bypass their normal procurement procedures just to get things done. (Although these pigeons are now coming home to roost).


The real shift in fundamental progress was going on behind the scenes of the frontline activities. The world’s pharmaceutical and biosciences industries were redirecting their considerable resources onto a single organism. Never before had one organism been subjected to such a huge opposing force. The results are now starting to be revealed to us and the first two vaccines are the early outcomes from more than a dozen already in late stage clinical stage trials. Behind them are estimated to be more than 450 other early stage trials for all types of preventions and treatments. Given the success of the first trials to be announced, the probability of the Covid 19 virus seeing the end of 2021 as a real or imagined threat to humanity looks increasingly trivial.


However, the real and enduring long term story is not that the COVID19 virus days of infamy are increasingly likely to be numbered, but that the technology that has been used to manufacture these first two vaccines and the other things it can do to improve the lot of humanity. mRNA and its associated CRISPR bio-engineering tool, have been known to science for over a decade, and they have been steadily making clear positive changes to rare disease treatment. But, until now it has largely been a solution looking for its first mass application. CRISPR’s time has just come and it is increasingly likely that we are witnessing the era when the molecule takes over from the microchip as the main locus of human technological progress. In short mRNA’s stunning early results in tackling COVID19 is the birth of programmable vaccines and opens the door further for all sorts of incredible bio-engineered health, agricultural and environmental outcomes. I think it is realistic to expect that the world’s first $trillionaire will be a bio-engineering entrepreneur.


Meanwhile, the world’s current richest man has revealed his company’s entry strategy into the retail pharmacy end of the healthcare market. As when Amazon bought Whole Foods in 2017 and the shares of other listed grocers were hit, this time it was the turn of the drug stores. However, this new move by Amazon is much more strategic than looking to add food items to Prime customers’ baskets. Grocery stores make wafer thin margins even when customers go to the trouble of visiting the store. Delivered grocery is even harder to do profitably. But retail pharmacy is the entry point into one of the largest undisrupted, highest margin industries left on the planet. Expect Amazon to quickly use the experience it gains in retail pharmacy to move quickly into other more protected, difficult and lucrative markets in primary health, wellbeing and fitness. With the major technology companies increasingly running up against each other in their developed areas of expertise, and also likely to remain under the spotlight of antitrust regulators, healthcare represents attractive virgin territory.


Another sector that big tech is repositioning in is money. Google set is stall out last week to develop Google Pay into a challenger bank. This takes it along the path that Ant Financial was heading down, until that is the Chinese Communist Party decided to block its IPO at the last moment. China is way ahead of the rest of the world in terms of cash apps and digital payments, yet Ant was prevented from revelling in an expected valuation of some $360bn. Although most commentators focused on the human interest angle regarding the flamboyant Jack Ma upsetting the CPC’s sensibilities, the reality is that all governments will seek to preserve their monopoly of money and I think the CPC only clocked what was going on at the last minute and moved to make Ant look and be regulated more like a bank in order they could save face and avoid an uglier task later.


Google is looking to join PayPal and Square by moving further into the private digitisation of money. It will be interesting to see if they also move to back up their offering with Bitcoin functionality. The cryptocurrency newsletters have been suggesting that Bitcoin’s extraordinary recent rise is because Paypal and Square between them are buying more than 100% of newly mined coins. If Google were to step in, this would be really game changing.


Amazon has also announced a partnership with Barclays in Germany to assist the lender to make better credit decisions using AWS’s AI offering. As with its partners in other product categories, I am sure Amazon will be keen to learn all it can about the returns that can be driven from this application prior to moving further into its own lending activities. It is going to be interesting to see how the ECB, the Fed and US Treasury respond to these moves. So far the suggestion is they are looking to launch their own digital currencies and are prepared to follow the lead of the private sector. However, my suspicion is that they will ultimately, but maybe less directly, follow the lead of their fellow Chinese monopolists and look to assert their control.


The other development in big tech is the imminent arrival of a new premier league member with the announcement of the IPO of Airbnb. Airbnb has re-invented a whole new market for global lodging and has put its own name on it. This is not a booking platform, this is a networked community of trust developed between hosts and guests and ranks as one of the world’s most recognisable and trusted brand names. This is evidenced by the fact that over 90% of Airbnb customers arrive on the website directly. It is ubiquitous, global and is arriving on the stock market despite the pandemic, not because of it. This company will become THE company in the hospitality, lodging and travel sectors over the years to come. It will be for those industries what Amazon is to retail and Google and Facebook are to advertising, a category disruptor. Last year Aibnb generated about $5bn in revenue, this year it will be more like $3bn, yet there is a serviceable addressable market of c $1.5tn. I like these dynamics.


Finally I listened to the management results presentation from UK listed Naked Wines. Free from its temporary entanglement with Majestic Wines, Naked is a pure online supplier of exclusive artisan wines. Interestingly half of its revenue now comes from the US market. The wine ecommerce market has trebled year to date as the pandemic has been a catalyst for making US consumers aware that it is legal and acceptable to buy alcohol online. Indeed because of the lingering prohibition era restrictions on shipping alcohol across state lines, the US remains the world’s most expensive market for wine, making Naked’s DtC integrated producer/ retailer model so attractive. The fact Naked has 20% of total volume of the DtC segment but only 5% by value, suggesting it has scope to move pricing. Naked is a significantly bigger and better business year on year and by continuing to reinvest into customer acquisition is building a competitive advantage. Given its unusual path, rising out of the shell of a previously listed UK business, Naked has had to rebuild a whole new investor base, hence the valuation still looks attractive. The enterprise value is just over £300m yet Naked should be able to deliver £40m of “standstill” EBIT this year from c £325m of sales. The internet of wine is a thing, and Naked looks like a prime beneficiary.

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