As we have nominated eight companies to be the Juggernaut 8, we are going through each one to detail out why each player is devastating the other players in their current industry. We plan to examine large competitors and their growth methods and initiatives. Today, we examine the Juggernaut Amazon.com (AMZN, $1,010.07). Beyond their dominant e-commerce business, they have the higher margin Amazon Web Service (AWS) business which will also continue to grow. However, much of their current growth efforts depend on selling everything to everyone on the web. Their only significant e-commerce competitor currently is Wal-Mart Stores (WMT, $79.15) with the acquisition of Mark Lore’s Jet.com.

Mark Lore and Jet.com. To give some background on Mark Lore, he was the founder of several singular e-commerce vertical plays, such as Diaper.com, Soap.com, and Yoyo.com (for toys). This Quidsi company was subsequently acquired by Amazon.com and Mark Lore retained as management in August 8, 2016. However, his stay at Amazon was a controversial one where he was very vocal of his discontent with Amazon leadership and subsequently left to start competitor Jet.com.

Lore’s Acquisitive Strategy. While Amazon’s growth strategy was to broaden products across all verticals and then facilitate multiple levels of sellers on their destination site and charge a service fee for that service, Walmart e-commerce strategy (after Mark Lore was handed the keys to the kingdom from Walmart’s CEO Doug McMillon) has been to grow via acquisition. Since then, they have proceeded to acquire solid e-commerce companies in niches along specific verticals, very much like Mark Lore’s old strategy with Quidsi. His central premise relies on beneficial supplier relationships in a vertical to present a more efficient and valuable experience.

Shoebuy Shoes $70M 1/5/17
Moosejaw Outdoor $51M 2/15/17
Bonobos Suits $300M 4/17/17
Source: KWCP Research

The Pricing Battle Commences. Since then, Walmart has announced free 2-day shipping for all users without joining a club such as Amazon Prime, which typically costs users $99 per year for free shipping, however there are some limits required for faster shipping. Thus, today, Amazon offered a cheaper version of Amazon Prime for lower income users.

The Demise of Retail. As Macy’s (M, $21.81) warned about a potential reduced margin outlook today, we revisit the demise of the retail sector and all the mall space in general as the main means of reaching the customer. Though many view Macy’s as still possessing brand value, and having real estate value, the demise of the leader in the department store sector has signaled the greatest annual tally since the Great Depression which can only be traced back to Amazon.

Struggling PE Retail Plays
J. Crew
Claire’s Stores
Toys ‘R Us

Chapter 11 Retail Filings
Aeropostale
Sports Authority
Sports Chalet
Payless Shoe Source
Bebe
Gordman’s Stores
Gander Mountain
Radio Shack (aka General Wireless Operations)
HHGregg
BCBG Max Azria
Michigan Sporting Goods Distributors
Eastern Outfitters
Wet Seal
Limited Stores
Borders Book Stores

Potential Publicly-Listed Retail in Trouble
Macy’s (M)
J. C. Penney (JCP)
Sears (SHLD)
Kmart (SHLD)
GameStop (GME)
Abercrombie & Fitch (ANF)
Barnes and Nobles (BKS)
Source: KWCP Research

Sector is dead. Is Walmart doing enough to survive? While we continue to believe small, niche retailers focused on service and box curation may succeed in niche verticals, we do not believe now any competitor is large enough to compete with Amazon itself. While Walmart’s new pricing and vertical acquisition strategies are, interesting and present a compelling silver medal, the gold still only belongs to one player. We point to Amazon’s recent closure of their acquired Quidsi asset on the grounds of non-profitability despite their team’s enormous economies and resources. So, the vertical by vertical strategy is not enough. Further-more, we view the once hailed ‘mini-warehouse strategy’ for retail stores to enter e-commerce (and hence efficient delivery with many points of contact) and now the retail outlet as a diversified fun place offering summer camps (see Michael’s (MIK, $17.51)) and cooking classes (see Williams-Sonoma (WSM, $45.77) and Sur La Table) as a good, traffic driving alternative and a bit gimmicky, but as summer camps are not Michael’s specialty, neither will they be the best at providing this service, and thus the public may not be willing to pay for these services in one way or another.
Daily Roundup EQ-060717

Juggernaut 8 Table 060717

With Mad Money’s Jim Cramer coining the term FANG stocks as the four horsemen stocks that have currently taken over the market and become the giant behemoths that dictate existing price growth in the stock market, we believe there are four more candidates that belong in that same tier, as we breakdown why these monsters have become safe havens for money despite the high stock price. These original FANG stocks include F for Facebook, Inc. (FB, $152.81), A for Amazon.com, Inc. (AMZN, $1,003.00), N for Netflix (NFLX, $165.17), and G for Google aka Alphabet Inc. (GOOG, $976.57). As mentioned in an earlier note, these four stocks encompass an aggregate of $1.69T in aggregate market cap, which is a ridiculously large amount for only four individual names.

While we also believe in these four big movers in the market, we would include another A for Apple Inc. (AAPL, $154.45), N for Nvidia Corporation (NVDA, $147.34), and M for Microsoft Corporation (MSFT, $72.52) for the anagram FANG-MAN for a total of $3.15T in total market cap, as also essential components for this evolving portfolio. We certainly believe Apple and Microsoft belong in group for their consistent and growing leadership in the consumer and enterprise software market, and Nvidia, is quickly building their strategic position in the chip market, taking leadership from the traditional monopolist Intel Corporation (INTC, $36.13) and Advanced Micro Devices (AMD, $12.02). An optional 8th member of the group is Tesla, Inc. (TLSA, $352.85) fits the bill as a leader in transportation and new energy industry currently.

Why Investors are Fleeing to These 8 Juggernauts

• Go where the growth is. Give me what you are going to be doing in the future. We surmise that the investing public nowadays is much more based on future projections and has gone beyond the ‘80’s Janet Jackson sentiment of ‘What have you done for me lately?’ to the tones of an expectant suitor in hopes of finding an eligible bachelor, ‘What will you do for me after we have 2.5 kids?’. We believe investors are locked in on the leaders of the next revolution, those companies that have shown both vision and execution in overthrowing the status quo establishing a paradigm shift in a singular strategic arena and then influencing adjacent industries. Those are the companies that have survived in the narrowing down the list of the most impactful global companies during the recent market run up.

• Higher valuations but cheap relative to growth rate compared with rest of the world. While by traditional static valuation standards the pricing on these companies can look very expensive, if you compare the growth rates of these companies and the potential to own important strategic junctures in industry beyond current revenue streams, these companies can look cheap. It is no coincidence that all eight companies are more-or-less technology companies diversifying themselves in different manners to affect other sectors. Thus, from mining to financials to consumer retail or packaged goods, the gains and growth in every industry has been those leaders that can redefine that specific industry with better efficiency through technology and better consumer interaction with the new tech.

• The Flight to Technology Safety. While you can ask the question, ‘why doesn’t every sector have a new representative in this new order of giant companies?’ The major factor is that certain players sit at more optimal positions within the changing landscape to take advantage of the evolving landscape. These players own the ecosystem they have creatd themselves and thus, the traditional flight to earnings or flight to safety has left the modern investors with a flight to ‘technology’ or ‘strategic’ safety. We believe that as our world continues to evolve, this will be moreso the case and perhaps as the first generation moved beyond P/E ratio to a PEG ratio to incorporate growth, the next generation may incorporate growth plus strategic positioning in a more useful metric to quantify the excess in valuation that should be awarded a firm.

• The DOW 50 Giants narrows down to eight stocks that make an impact on the world. Has the world now be narrowed even further down to eight firms that control the destiny of the future? Not so long ago, the Dow 50 Giants were thought to be an already narrow subsection of the entire capitalistic landscape, and in classic Joseph Schumpeter-ian fashion, that elite class has gotten even smaller. We believe this will continue to hold true with less or limited government intervention. As Microsoft did a generation ago, companies with resources from breakthrough products, eventually manever to control those intersections that will affect the most change in adjacent industries. And thus, the field narrows, like a giant game of playground Wolfpack.
Price clarity on these companies will become a moving target based on strategic positioning strength and adjacent industry influence, in our view, because in the end, that will be what determines price sensitivity and ability to customers to find suitable replacements and substitutes. In the future, customers will continue to be offered what they want in a variety of different offerings, but those offerings will pass through the strategic checkpoints garnered by these juggernauts. Without the hall pass, the other industries will struggle to grow via technology which will stunt their growth versus their direct competitors, which allows these gatekeepers to take their pound of flesh.

KWCP_Research_DR-060617.doc

Category Archives: Analyst Briefs

KWCP Daily Roundup/Sector Focus June 7 The Amazon Empire…..

KWCP Daily Roundup June 6 The Juggernaut 8 aka FANG MAN T