Dashing up...
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In today’s KnowHow…
Dashing up…
The crypto wars
Are we seeing the return of the “Misery Index”?
Streaming wars shift to consolidation
Iran gears up for return to oil market as US talks advance
What happened overnight…
It is a bit of a damp squib out there this Monday morning with US futures slipping slightly as investors weighed risks to the outlook including inflation (once again) and a spike in Covid-19 cases in some parts of the world. Over in Europe and having opened in the green, the Stoxx600 has traded off with automakers offsetting declines for energy firms. In Asia, Taiwan and Singapore benchmarks lagged as Covid restrictions tightened. On the single stock side, the stand-out is Discovery where the company’s shares jumped 16% in premarket trading after it was said to be poised to merge with AT&T’s media business (more below). Finally, treasuries nudged higher while Gold hit its highest level in almost 3 months.
Chart of the Day
We don’t seem to have a weekend without Elon Musk shaking up the crypto world at the moment. And this weekend, seemed like an all out crypto war. Last week, he announced Tesla would stop accepting Bitcoin due to mining concerns using coal. But, Elon has clearly been riled by some of the comments that have subsequently come his way… he went harder this time.
And, inevitably, he’s hit the price again. Our slightly messy Bloomberg chart below of what Elon has been doing to Bitcoin all year.
Analysis
Dashing up…
For those of you who have been with us since the early days, you will know we are positive on the food delivery names, despite increased competition and a potential post-pandemic fall in demand. You may also remember our original analysis on Uber (here). For Uber specifically, we noted two reasons we like the name as a post-lockdown play: i) the return of mobility and, ii) the Uber Eats side of the business driving further growth for the company. Looking at the latter and the Door Dash results on Friday have given us a clearer understanding of a more normalised post pandemic food delivery environment.
What happened on Friday?
Door Dash, the delivery app and platform company, reported on Thursday that its 1Q gross order volume and revenues more than tripled. Not a huge surprise, given the lockdown in 1Q, but they continue to see strong demand despite re-opening. The positive tone from management drove the shares up 22% on Friday, the largest one day climb in the shares since the company IPO’d.
A few points that make us incrementally more confident in the post-pandemic trading environment for delivery companies, including Uber Eats:
1) New customers average order rates AND customer order rates are higher than the pre-pandemic period This is key for us and points to the fact that even when the US was starting to leave lockdown, in Q1, average order rates were well above pre-COVID-19 pandemic historical averages. Both new customer order rates and existing customer order rates (see chart below) have continued to increase and are substantially above pre-pandemic levels. This gives us even more confidence that the pandemic has led to a step-change in consumer behaviour.
2) New customers continue to grow: Door Dash acquired new consumers at a pace that was consistent with the prior two quarters, with payback periods that remained well within our thresholds. Even as we leave lockdown, customer growth continues which again is supportive for the delivery names. As you can see from the chart below, it is Uber Eats and Door Dash that are taking share.
3) DashPass strength: Door Dash more than doubled DashPass subscribers Y/Y and drove DashPass average order frequency for the quarter to an all-time high since launch. As a reminder, Eats Pass offers a very a very similar offering and will benefit from similar trend.
What does this mean for Uber?
The short conclusion is that Friday reassured us that the food delivery side of the Uber business will continue to perform well in the post-pandemic world. The positive order rate data gives us greater confidence in the step-change in consumer behaviour since the pandemic and while the summer months may see a downtick in orders, we are more confident that the delivery platforms, especially Door Dash and Uber Eats who are taking share (see below), are able to retain customers in their restaurant side of the business and drive further growth in new categories. On top of this, the upcoming launch of ‘everyday essentials’ should act as another catalyst for the Uber Eats side of the business.
Valuation:
To get to our TP of $80 we value the Mobility business on 5x EV/Revs, the Delivery business on 6x Ev/Sales (1.75x EV/Gross Bookings) and the Freight side of the business on 1.75x EV/Revenue. We now see upside optionality to our valuation from both the speed of the mobility recovery and a higher normalised Uber Eats performance as we live in a post-pandemic world. Both of these are not currently in our forecasts.
What we’re reading
Are we seeing the return of the “Misery Index”?
Many of our readers won’t be old enough to remember the “Misery Index” back in the 1970’s but for those that do, they’re a bad memory and will certainly be something that may be causing a few sleepless nights in the White House. As the 1970s showed, high joblessness and rising prices the United States saw in April can be a potent political force. Republicans crafted a “Misery Index” out of the two factors to attack then-president Jimmy Carter. After hitting 75% approval ratings early in his presidency, the Democrat was trounced in a 1980 landslide. The index is simple. It is the combination of the inflation and unemployment rates and as you can see from the chart below, peaked in the 70’s. The worry for Biden is that we are seeing a similar situation at the moment in the US and while the White House still suggest this is transitory and they “fully expect that will work itself out in the coming months “ it is something that will be on the minds of all Democrats.
Streaming wars shift to consolidation
This weekend, we got the news that AT&T is in discussions to merge its Time Warner assets with the Archegos plagued Discovery. Remember, AT&T acquired Time Warner in 2018 for more than $150bn. The media assets include CNN, HBO and Warner Bros. Along with Discovery’s lead in reality/fact-based content, that’s a streaming power house in the making. But, it’s also not surprising.
US streaming is increasingly a mature industry. Using Netflix as a proxy for US market penetration, you will see that almost 75m US households have access to a subscription. You can argue that there is scope for that number to rise as Netflix clamps down on account-sharing etc, but regardless, the market penetration story has shifted to pricing over the past year. Netflix’s North America average revenue per user (ARPU) is a little over $14/mth. The question then becomes, how many such services does a consumer actually need and is willing to pay for? We would suggest the opportunity is maximum 4 per user. In which case, the US streaming market is ripe for consolidation.
Iran Gears Up for Return to Oil Market as US Talks Advance
While there are a lot of moving parts here, not least because Iranian Oil is already on the market, It is interesting to read that Iran is preparing to ramp up global oil sales as talks to lift U.S. sanctions show signs of progress. It is worth noting though that even if a deal is struck, the flow of additional crude into the market may be gradual given the length of time to increase production and the fact that many refiners sign annual contracts at the start of the year. Under the most optimistic estimates, the country could return to pre-sanctions production of almost 4 million barrels a day in as little as three months and it could also tap a flotilla’s worth of oil that’s hoarded away in storage. As the chart below shows, Tehran has already taken advantage of a less hostile climate since President Joe Biden came to power in January. It is reviving petroleum sales, sending more crude to emboldened Chinese buyers.
Futures in New York traded near $65 a barrel while Brent was just under $69 in London with some investors pointing to new demand concerns that are emerging in Asia where the coronavirus in India is crippling the nation, while Singapore and Taiwan grapple with new outbreaks.
