What beckons us at the end of all this mayhem? A period of economic dynamism? A once in a century boom? The best era for manufacturing? Fresh expansion? Techno-Optimism? → Nobody knows!
I’ve been studying how markets have emerged post similar disruptions from the 1900s. Here are some noteworthy observations on the market bubbling & prospects of similarities to the Roaring 1920s post the Spanish Flu.
This study sprung up exploration into Market Bubbles.
Bubbles formed by accelerated adoption of exponential technology & booming business model innovation.
What truly causes Bubbles?
Bubbles are not caused by over optimisim in the market or valuation corrections.
Bubbles are caused by the race between companies making real fundamental different thesis’ of how the world should be
Some examples of these Fundamental Thesis’ on how the world should be:
- Digital currency will replace the U.S. dollar as the dominant currency
- Electric vehicles will eliminate ICE
- Marijuana will displace a large portion of modern medicine / replace alcohol and tobacco as the recreational drug of choice
- Space travel will become the new logistics platform / Space tourism will displace beach vacations
- Home-sharing will replace the hotel industry
- Ride-sharing will eliminate the need for personal vehicles
- Autonomous driving will replace human drivers
- Plant-based meat will replace animal meat
- Food delivery will fundamentally alter consumption patterns
- Gyms, calisthenics, and merely going for a jog will be replaced by digital workout platforms
- Video conferencing will replace in-person meetings
These thesis’ require changes at a level that's the economic equivalent of the laws of physics.
And few companies emerge as winners eg. $AMZN displacing a massive share of retail.
Well, what about the others.. they fall fast and mostly, die.
Companies with large, exponentially rising market caps need to get a multitude of factors right to become profitable & sustainable over the long term.
And lately, I have been seeing fundamental problems with unit economics, lack of barriers in competition and increasing regulation.
Scale does not necessarily improve margins like being envisioned
- eg. $ABNB
- the biggest alternative bookings platform in the world has more than 2x the market cap than the next biggest chain $MAR
- there is an inherent price competition with a person incentivised to rent out with the platform providing the “biggest cut” (e.g competition from Home Away)
Competing on price to gain market share is not sustainable & may never lead to profitable growth
- eg. $UBER
- At $93b market cap and constant price squeezing from competition like $LYFT
Humungous market caps with no sustainable route to profitability are worryingly everywhere
- Eg. $DASH
- current food delivery at scale unit economics of $3-$5 not being sustainable to create profitability
- who’s gonna order a $6 meal that costs $8-$10 to deliver? Considering the practicalities of driver time, gas, wear and tear, liability insurance
Race to Zero for Video Conferencing / Remote working software & Winning Customers:
- Eg. $ZM
- At $107B market cap there is a strong incumbent disadvantage here — the disruptor opens the door to a value pool, other disruptors have a low barrier to enter & capture
- why would people pay for a great service when a similar one is available for free? (large range here for both consumer and producer surplus with high margins and low variable processing/server costs)
- Endgame winner is the customer getting great products at next to no cost
For this thesis driving companies to grow into their ample market capitalizations, 3 layers of difficulty must be overcome
- The originally predicted disruption must happen
- The disruption must be defensible such that the disruptor captures the value rather than a disruptor of the disruptor
- The margins which are currently negative, somehow turn positive and the customer demand still exists at the new price point
Be wary of how ’21 unfolds, I’ll be especially gauging:
- “Pent Up Demand” → Consumer indulgence & binging on travel, restaurants, bars & new clothes → Are we overestimating this with more stickiness to newly formed habits / will this launch like a suppressed spring
- “Speed of Supply” → Will this lag behind? / Will oversupply be repurposed into unexpected new uses and unusual substitutions?
- “Mis-gauging Needs” → Are we looking too closely at recent behaviour and demand patterns to predict future ones? Are we at risk of being over-indexed to highly aberrant volatile patterns?