Back to School: 3 Trends to Know

On the Market:

As September rolls in and a school year begins, here are 3 trends worth “studying.” Although investment opportunities are still developing, I expect these areas to generate massive returns in the future.    

1. Video Games & “E-Sports”

Some facts to consider. . .  

• 2.6 billion people play video games. That’s more active users than Facebook.
• 400 million watch others play online. Twitch has a larger audience than Netflix and HBO combined.
• The Olympic committee is considering adding e-sports to the 2024 games.
• 50 colleges offer scholarships for video gaming.  
• This industry is expected to generate $200 billion in revenue — from game sales, e-sports tickets, broadcast rights, advertising, and merchandise. 

The rise of the cultural phenomenon ‘Fortnite’ — along with e-sports selling out NBA arenas while broadcast on national TV — is raising new awareness about video games. Personally I’d rather be reading books, but I won’t make any jokes about “gamers.” It’s no longer just about dudes in a basement (if that was ever true), as there’s increasing appeal across genders, ages, and other demographics. This trend is going to become much bigger, and it’s just getting started. 

The New York Yankees are currently worth $3.7 billion. I think e-sports franchises can become more valuable because video games are so global. The most faraway opponent possible for the Yankees is the Seattle Mariners. Meanwhile an e-sports team hailing from New York could face opponents from London, or Beijing — simultaneously — along with truly global audiences of millions. Imagine how much revenue this industry can generate if its events draw as much attention as the World Cup — and occur not just every 4 years, but several times in every year.  

That would certainly be remarkable, but so far I’ve found it challenging to identify sound investments. There are 3 public companies in the video game space that have been highly visible for a long time (Electronic Arts, TakeTwo Interactive, and Activision Blizzard). As far as I can see there is no clear winner with distinct competitive advantages, so their fortunes should fluctuate based on whoever generates “hit” video game titles.

I suspect Wall Street is throwing money at all 3 of these stocks, because it — like yours truly — does not yet understand this space. What is clear to me is this industry is worth paying attention to, even if the winners are still to be crowned.

On my radar for investing: Tencent, Huya, Valve. Also of note: Amazon owns Twitch, the world’s premier streaming site by a mile. It’s another reason I continue to recommend Amazon stock, a relatively safe way to gain exposure to this growth trend.

2. Hotel Disruption

Uber is credited for being the prime disruptor of the taxi industry. The firm benefits from a two-sided network effect — a service can’t compete with Uber unless it offers a sizable number of drivers, and drivers will only work for a service that already has lots of customers. For these reasons and more Uber is considered to be the world’s most valuable startup ($60 billion).

I would argue that what Airbnb has established is more unique, and potentially more valuable. It’s one thing to convince people to trust Uber enough to step into a stranger’s car in their hometown. It’s a whole other level of trust for people to enter a stranger’s house in a foreign city (not to mention sleeping unconscious for hours with passports and other valuables exposed).

The network effects Airbnb has forged with travelers and property owners across the globe will be extremely difficult to compete with. Relative to cars, physical buildings are much less fluid. There are many alternative ways to move humans around, but relatively few buildings that can sleep humans (especially considering the wants of lucrative travelers!).

While hotel brands struggle to differentiate, Airbnb has access to unique inventory including homes located in areas without hotels. It can thereby provide “experiences” that resonate with millennials much more than brochures at a concierge desk.

Airbnb is considered to be half as valuable as Uber (at $30 billion), though that number is higher than the world’s top five hotel chains, combined. I also think HotelTonight is worth keeping an eye on, though its competitive advantages are less robust. 

On my radar for investing: Airbnb, HotelTonight.

3. Food Delivery

Innovation in food has undergirded mankind’s progress since the days of creation. Concepts like agriculture, corporate farming, and modern refrigeration techniques improved life by unlocking time, in addition to bettering the consistency and quality of our diets.

I believe “delivery” will one day be considered the next major milestone in this pattern. Yes, people have been able to order pizza for decades. But what I’m talking about goes far beyond that, or even the convenient services offered by companies like Grubhub today.  

I expect that certain technology platforms will empower individuals to deliver increasingly niche food items to increasingly niche audiences in a way that is more efficient, instantaneous, and customizable than anything we’ve seen before. This will be accomplished by leveraging pieces of newly emerging infrastructure that have yet to be fully developed or integrated.

It used to be that an individual — let’s say “Grandma” — having mastered a personal cookie recipe, would have little chance to make money with it outside the home. Good luck getting distribution via traditional gatekeepers (packaged good companies, food distributors, grocery stores, or restaurants). The “food truck” model has brought some innovation to the space, as it requires less infrastructure to get a quality food item in the hands of consumers. But this has only unlocked a fraction of the potential that exists in smaller-scale food production.

Imagine a reality in which Grandma doesn’t need any business operation (beyond her kitchen) to make cookies for the world. She wakes up in the morning and logs into a front-end service like Grubhub, where she sees real-time demand for two dozen of her specialty cookies. Once made, the cookies are picked up and delivered by a transportation courier such as Uber.

The prices fluctuate in real-time based on supply and demand, as well as reputation. If Granny only feels like making two dozen, she can notify the system at which point the inventory will be “sold out” for the day. But if people across the globe really enjoy her cookies she will earn a following (similar to social media influencers) and can charge premium prices.

The increased competition brought on by plugging individuals’ recipes into a global food infrastructure will inevitably lead to better tasting food for all, at relatively fair prices. Imagine how many people across the world can make one truly fantastic dish, but simply aren’t able or interested enough to make a career of it. Am I the only one who thinks the possibilities are mouth-watering?  

Grandma’s cookies are just one example — the same concept applies to full meals as well. Kitchens are already getting smaller — I would venture to say that at some point in the future the concept of cooking in the home will be considered old-fashioned, experiential, or hobbyist.  

Perhaps this is just another of my “pie in the sky” aspirations for the future. Or perhaps it would take a long time to develop, especially if adjacent services focus on competition instead of integration. But I’m willing to bet that companies that execute toward truly bespoke food delivery will be able to aggregate lots of loyal users. That in turn, as we’ve seen with Uber and Airbnb, creates significant value for shareholders.

On my radar for investing: Grab, Grubhub, Go-Jek, Meituan Dianping.

Next Steps

My hope as I continue to learn about these trends is that clear winners will emerge (or IPO), with enough competitive advantage for me to recommend buying stock. Once that happens I’ll be happy to share more thoughts with you.  

— Sept 13, 2018