Then came September, and now they all seem doomed. What a difference a quarter can make, not helped by Apple’s profit warning. I’m not that surprised, but some of the commentary is exacerbating, which is euphemistic. How on earth are the woes at Apple being extrapolated across the broad-brush ‘technology’ sector? I witnessed a sell-off in Amadeus (global travel), Delivery Hero (EM food marketplace), Xing (B2C/B
social network) and Zalando (online retail in Europe). What do these names have in common with Apple? Absolutely nothing. We all know growth is slowing globally, but extrapolating poor iPhone sales and Apple-specific issues in China to other, uncorrelated plays is irrational.
I wrote an article back in early 2018 titled ‘seeking quality tech’ where I was, as ever, bullish about the long-term prospects for the business models that I own. The article was in part about evolution and a behavioural shift in how we are consuming, the convenience we demand from our online portals and the power of platforms. Whilst these were flavour of the day, we, and the wider market, made some great returns through 2017 and most of 2018. These names have now fallen out of favour, so I thought it was only fair that I reflect on what I own, how they’ve performed and how I’ve positioned them across the portfolio.
These companies’ business models have all the characteristics I would look for, irrespective of sector or badge we ascribe – wide moats, high levels of recurring revenue (in several of the below cases), high market share, strong balance sheets and high returns on invested capital. There are some outliers that I see as future winners: Takeaway.com, Delivery Hero, Xing and Zalando, or a diversification tool such as Rocket Internet, which funds digital start-ups.
I’ll make no apologies for starting with Takeaway.com, because it was one of my top performers in 2018. Food marketplaces like these are mostly winner-takes-all, or winner-takes-most, depending on the region. I tend to have the view it’s the former, which, post the sale of Germany in late December, has almost played out across Europe. The margins, returns and cash flow that are generated in these markets, once won, are significant. The Netherlands, for example, makes a 53% earnings before interest, taxes, depreciation and amortization (EBITDA) margin, and they still only have 27% market share.
However, in totality, Takeaway will only turn a profit at the EBITDA level for the first time in 2019, so this isn’t an investment for one year – it’s for the next 5–10. There has been a massive structural shift in eating habits, driven by time, convenience and the breadth of restaurants, which has grown with delivery.
Having made the initial purchase at €45, I’m nursing a bit of a bloody nose, but post the sale of Germany (a smart, strategic move), I see this as a great opportunity at an attractive valuation. They have a significant net cash balance sheet and are investing heavily through 2019 to enhance their market dominance, which is already reaping rewards in new customers. They are the market leader in 33 of their 41 markets, where it is exceptionally challenging to displace the incumbent given customer loyalty to the market-leading platform. Whilst timing was not clever, I see great value today and have been building my position of late given the long-term returns I see on offer.
The other poor performer this year is Zalando, which has been hit by several one-off factors, including a weaker backdrop, longer summer (deferred sales), heavy discounting by peers and some stock-specific issues around returns and fulfilment costs. ASOS, another online peer, also had issues and from reading the rhetoric, the market has completely lost faith in the longer-term margin potential of these businesses. The analysts are extrapolating a drag from the increased investment in distribution and their partner programme far into the future, with no operational leverage from the benefits these will bring. Maybe they are right, but Zalando isn’t far off its IPO price of €21.50 set back in 2014, which I see as anomalous, given what
they have delivered:
I don’t do forecasts, so I won’t suggest what the short term will bring. But I do know you don’t make money by following the herd. I’m not advocating jumping headlong into these names and I’m certainly not calling a floor. I’m saying that I see good long-term value in businesses with a competitive advantage. I’ve therefore been incrementally adding to these names where I see a disconnect with the fundamentals – only time will tell if the market sees what we do.