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Stock winners and losers as Millennials flex investing muscle

Photo of Joe Magyer, Lakehouse Capital By Joe Magyer, Lakehouse Capital

min read

A unique generation for the digital age challenges.

Every generation finds itself at odds with its predecessors. Let me guess: You grew up thinking your parents were old-fashioned while your grandparents often griped that kids these days don't know how easy things are.

And every generation has its challenges. Baby-boomers suffered under the weight of double-digit inflation. The generations before them fought in two world wars.

Millennials are grappling with their own generational financial crisis: the bloated cost of the Australian dream. The average Australian dwelling, for example, now costs around 12 times the average annual wage of workers aged 25 to 34, according to ABS data.

What of Generation X? Don't mind us. No one does, which is why we are still filled with angst and listening to Pearl Jam in the garage.

The actual age of millennials is hard to pin down, because people ranging from their mid-teens to mid-30s identify themselves with the generation. But there is one stark trait that makes millennials stand out from all previous generations: they were the first to mature in the digital age.

Massive economic repercussions

Millennials’ digital-first mentality has massive economic repercussions, especially with most of them now out on their own and in the workforce. Some players in particular industries are being thrown under the bus as a result, while new challenges will be raised high.

I'll discuss a few key investing themes here and their investing implications. As a word of caution, though, don't take any companies I mention here as stock picks or advice. I'm only aiming to illustrate points.

Media

The ground is shifting underneath the feet of traditional print, radio and television providers as more news, music and video goes digital. Indeed, a Roy Morgan survey last year said that more Australians had a streaming video-on-demand service (think Netflix) than they did traditional Foxtel.

Rising competition for eyeballs and eardrums won't just challenge incumbents on pricing. It will also pressure them to cut content costs, weakening their offering in a self-fulfilling cycle of market share losses to the streamers, who can spend progressively more and more to acquire and delight customers.

Do not underestimate how slow a burn this trend is. YouTube was not launched until 2005 and Netflix streaming in 2007, yet it wasn't until 2013 that the number of US households with pay TV sank into an irreversibly negative trend. If you're thinking long-term, this is a hard space to stay excited about.

Online retail

You have probably heard a lot about Amazon lately. Get used to it. Yet again, this is a category that has a long way to run. Even in the US – the birthplace of e-commerce and where Amazon was founded back in 1997 – the Department of Commerce reports that e-commerce is still growing at 16 per cent and only makes up 8.9 per cent of total retail sales.

Given those trends, and that online retailers will only become more competitive here as they scale and Amazon enters the market, it is hard to imagine a bleaker industry-wide secular outlook than bricks-and-mortar retail. I wish the combatants luck. They'll need it.

Digital payments

Cash is on the way out. According to a 2016 paper from the RBA, The Future of Cash, its share of the value of transactions in Australia fell from 29 per cent in 2010 to just 18 per cent in 2013, and no doubt has fallen further since. The paper notes that the percentage of transactions made with cash by 25 to 34-year-olds was around a third lower than those aged 65 and over.

Even though this mega-trend has been running for a while, I still think it has legs and there are listed domestic (e.g. Afterpay Touch) and global (e.g. PayPal) companies benefiting from the fall of cash, rise of digital, and in particular, the rise of online retail. Again, don't take those as picks and do your own research.

Social trends

It is hard to overstate the importance of social media today, if for no other reason than the time it eats up that people used to spend watching TV or drifting around the mall. Facebook alone now has 2 billion monthly active users.

For those who are sceptical about whether social media is a “real” business, and I used to be one myself, be aware that Facebook posted a bigger profit over the past year than the Commonwealth Bank of Australia. There is big money in that big data.

And the winners take most

An even more important point to make on millennials powering the rise of the digital economy is the towering economic principle of the digital economy: Winners take most.

Investors unfamiliar with investing in technology companies may not realise that the way economics is shared in the digital world is very different to the physical world, where scaling is costly and difficult, leading to slower growth and fragmented markets. Businesses born in the digital world can scale faster and cheaper than their bricks-and-mortar ancestors.

Because they can get bigger faster, they are able to benefit from virtuous circles of demand.

Consider retail. Walmart, which employs more people than live in Brisbane and did US$307 billion in sales in 2016 at its namesake US stores, still only makes up around 6 per cent of America's total retail sales. Amazon, meanwhile, makes up around 43 per cent of online US retail sales and 53 per cent of the market's growth.

Why has Amazon been able to gobble up around seven times the market share in US online retail as Walmart has in total US retail, despite the latter having a 35-year head start?

For a start, Amazon could and did scale faster without having to tie up years and billions in a physical store footprint. Indeed, Amazon’s market capitalisation is almost twice Walmart's despite, and partially because of, Walmart owning about three times as much net plant, property and equipment.

Adding fuel to Amazon’s fire, though, is the virtuous circle of its low prices, vast selection and fast delivery. Amazon's lower prices and wide product selection attract strong demand, which enables the company to buy in greater bulk, offer a wider range and attract more third-party sellers. This results in even lower prices and an even wider selection.

Amazon's fast fulfilment also feeds on itself: short delivery times drive greater demand, which allows the company to reinvest even more in moving even closer to its customers.

The examples get even more pronounced when we start talking about businesses that are purely digital and global ambitions because they can scale at hyperspeed. Bunnings might be the Home Depot of Australia, but the Google of Australia is Google.

The dynamics of a winner-takes-most market also means that not only will the winner gobble up outsized share but also an even more disproportionate share of value; the market will coalesce around a small number of players. Facebook has about six times the number of monthly average users as does Twitter, for example, and 16 times the revenue.

An example closer to home is in the “buy now, pay later” digital payment companies in Australia. Remember Afterpay Touch? The Afterpay part of the business had 840,000 users on its platform at the end of the fiscal year, while rival ZipMoney had a customer count of 301,000.

Both are growing strongly. However, Afterpay is adding more users off a larger base, including 283,000 users in the latest quarter, meaning that if current trends were to hold, it would run away with the market, or at least if comparing between just the two players.

About the author

Joe Magyer is the chief investment officer of Lakehouse Capital Pty Ltd (ACN 614 957 603). He owns shares in Amazon, Google and Visa. The Lakehouse Small Companies Fund owns shares in Afterpay Touch. This article contains general investment advice only. Lakehouse Capital Pty Ltd is the Corporate Authorised Representative of The Motley Fool Australia Pty Ltd (AFSL 400691). Follow Joe: @Magyer

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