SIMON BROWN: I’m chatting with Craig Antonie, CIO at AnBro Capital. Craig, I appreciate the time. Last week Shopify, were doing a series of layoffs, and I was reading the CEO’s letter as I often do… But what really struck me was the chart included in the post. He talks around the sort of pull-forward we saw during the pandemic when we were locked down and [doing] online shopping. It was broader than that. It was Netflix, it was everyone [that] really benefited and it looked like that growth trajectory had leaped forward a couple of years – some folks said five, some said 10 years. But the Shopify letter [was] saying no, actually it’s reversing, sort of going back to the mean.
Your sense? Is that a fair take or perhaps an isolated issue, more just for Shopify?
CRAIG ANTONIE: Hi there, Simon. Thanks again for having me. I’m always happy to be here. I think it certainly seems like it was a trend that sort of sped up and then has started reversing. It’s probably true for both online as well as general retail. If one looks at the numbers we’ve received lately from the likes of Walmart and Target as well, they’re all saying there’s been like a stimulus and a pandemic flush that’s basically coming out of the system.
Now, if you look at e-commerce as a percentage of retail sales going into the pandemic, it was growing at about 14% per annum on average. We then had a very big spike during Covid. Ever since then it’s been trending back to that 14% level. If you look at it in absolute terms, it was about 11% of total retail sales going into the pandemic; that then shot up to about 16.5% at its peak and now it’s back down to around about that 14.3%-odd level. So, over a two-year period it has pretty much shot up and come back down, but it’s still in line with long-term average growth rates.
SIMON BROWN: I suppose that’s an important point. Also Shopify is kind of like an Amazon for private individuals, in that I can take whatever it is I sell and use Shopify as a platform. Etsy would be another example, though there you’re kind of using their warehousing in a sense. It’s not that growth has gone, it’s just that it accelerated. Everyone had a really great 2020, to a lesser degree a 2021, and now some normality is returning and it’s back to, as you mentioned, 14% a year – [which is] good growth anyway.
CRAIG ANTONIE: Yes. So I think clearly it does seem as if that sort of Covid spark has proven to be a bit of a blip. What we saw into that spike was companies were put under quite a lot of pressure. They decided to ramp up on a whole lot of things when it came to expenditure. You see that in the Shopify numbers that were out late last week. General and administration expenses were up 85% on the prior year. R&D [research and development] expenses were up 100%, sales and marketing up 63%.
So they took a decision to ramp up that expenditure to make sure that they remained relevant to their clients and in turn to the market. But clearly that then coincided with a pretty quick slowdown, back down to the mean.
As a result the numbers have been hit quite hard on the back of that.
SIMON BROWN: We see it, again, across industries. There were headlines out towards the end of last week: Amazon reducing their staff count by I think 99 000 people. I suppose a lot of companies really sort of boomed up for that period, and perhaps over-capitalised. In some cases it is going to mean staff layoffs. Of course, if you’re big, if you are Amazon, I imagine this is probably an easier thing to swallow, notwithstanding they’re still laying off some staff.
CRAIG ANTONIE: Yes, for sure. I think the problem you have is … in the back of my mind I think to myself perhaps CEOs at some point knew this might be the case. But the problem you would have is that the alternative might have been worse.
In a market that’s so competitive, if you have a massive rushing demand and you don’t have product or capacity or something like that, clients just go elsewhere. So they probably did what they had to do to ensure they kept their competitive positioning.
When things start normalising they obviously look a little bit bloated and need to lean back a little bit – to your point Amazon cutting back some staff, Shopify announcing 10% of their workforce is now going to be cut as well.
SIMON BROWN: I take your point. They were almost between a rock and a hard place. They couldn’t do anything; if they did do something, there was a risk they would end up here.
A quick last point. We’re seeing earning seasons come through. You’ve mentioned some of them. If I look at the big guys, the Apples, the Amazons – we can even throw Alphabet and Microsoft in there, and I suppose the non-social media to large degree – the results have been fine. They’re not shooting out the lights but, all things considered, such as a tough economy, such as rising rates and inflation and the like, these companies are doing great. Apple’s growth was single-digit, but still they had the best quarter ever.
CRAIG ANTONIE: Yes. I think the important thing to realise, and it’s something we sort of focus on quite acutely here, is that the growth rates may have slowed down but they are still growing. That growth is off, arguably, a considerably higher base because you’ve had this whole Covid pull-through for a lot of companies.
So the ability to still grow after having a year or two of massive ramp-up I think shouldn’t be lost on investors out there.
So yes, the rates have slowed, but they’re lapping some pretty heavy comp numbers in the prior year or two. And you’ll probably find, I guess only a year or so from now, that you’ll get some normalised growth rates again once things get to a sort of steady state.
SIMON BROWN: That’s a great point. They are comparing to Q2 of last year where yes, we had some vaccines but we were broadly still locked down.
A quick point, something that you and I have chatted on before: when you’re looking at tech investments – I’m thinking particularly of your Unicorn Fund – you want that runway. You are not looking for one-quarter wonders. It’s can this company grow over many years at a sustained rate?
CRAIG ANTONIE: Yes, exactly right. And if you look at something like Shopify as a case in point, they obviously operate as a facilitator of retail, if you like, and e-commerce. Now, to put this into context, I guess, the retail market in the US is roughly a $6 trillion market on an annual basis. This market has grown at an average rate of just under 5% per annum for the last 30 years. Now, e-commerce as a portion of that is growing at roughly three times the pace of total retail sales, and that’s the space where these e-commerce providers like Shopify really play.
Now Shopify reckon their total addressable market is about $153 billion, and their share of their market at the moment is simply 3%. It’s very, very low. So the opportunity is massive.
They’re spending a lot of money to make sure they can capture that, and one thing we are watching quite closely is the big investment they’re putting into their fulfillment network (Shopify Fulfillment Network). If they can get that right that could really be a game-changer for them.
SIMON BROWN: Absolutely. I take the point. Online shopping is just massive and I know my trends have changed and yes, I’m doing less of it. But I’m still out there and probably doing more sort of year on year as time moves on.
We’ll leave it there. Craig Antonie, CIO at AnBro Capital, I appreciate the time.
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