Pro Perspectives 7/22/19

July 22, 2019

On Friday, we talked about the strong Microsoft earnings. 

Thanks to the strategy reset that took place five years ago, Microsoft is part of the duopoly in cloud computing.  And that has led Microsoft to stand alone (at the moment) as the only trillion-dollar company in the world.   By the end of the week, we will likely see them joined (again) by the other half of the cloud computing duopoly, Amazon. 

When we think about the great "disrupters" of the past decade, and how the industries that they've disrupted will be left, when it has all shaken out, I think this MSFT/AMZN story is a good analog.  

The giants of industry, if they move aggressively with the disrupters, have the distribution to compete, if not beat, the disrupters. 

The Walmart/Amazon battle is another great example.  The market has priced Amazon like a runaway monopoly — killer of all industries, especially retail.  And the perception has been that Walmart was destined to become another rise and fall story of a dominant American retailer.  Sears, Toys R Us and about 70 other retailers have gone under in the last four years. 

But Walmart has been transforming.  
 

Walmart has been aggressively investing in online. They bought Jet.com in 2016, an American online retailer.  That same year they took a large stake in the number two online retailer in China, JD.com.  Walmart now owns 12% of JD. 
 
JD.com already has a big share of ecommerce in China.  They are number two to Alibaba, but gaining ground due to some clear competitive advantages.  JD owns and controls its logistics infrastructure, and does quality control from the supplier to delivery.  And unlike Alibaba, JD sources product to its warehouses to fight the counterfeit goods risk – a big problem in China. JD has 500+ warehouses around the country, and they now source product and service customers from one of the more than 400 Walmart stores in China. 

So Walmart is positioned well to take advantage of the growth in the middle class in China.  Amazon has yet to find its way in China.  It has about 1% market share.   Add to this, Google came in last year with a $550 million investment to help position JD to challenge Alibaba and Amazon on a global scale.  Walmart is still about a third of the value of Amazon, but the gap has been closing (slowly). 

Lastly, let's look at Netflix and the response underway at Disney.  In recent years, Netflix has been thought to be taking over the entertainment industry with its disruptive direct-to-consumer model. 

Fox responded early and aggressively (thanks the activist investor, Jeff Ubben).  They made an aggressive move to build the direct-to-consumer model (taking stakes in Hulu, Star India and Sky).  That set the company up as an acquisition target.  And now with the Disney acquisition of Fox, Disney is positioned with a dominant duel threat — among the world's deepest and most valuable library of content and the distribution to take it to the consumer.  This makes the world's preeminent entertainment company.

The result?  Disney's valuation has leapfrogged Netflix.  Disney now has a market cap of $250 billion. And Netflix has plunged $50 billion in value, to a market cap of $135 billion, since the Disney/Fox marriage last year. 

 

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