How to Profit from Disruption: Part 3.

The third part of our series looks at food delivery, smartwatches and e-commerce, three sectors that have been directly impacted by lockdown

  • James Gard
  • 7 min reading time
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Even as lockdown measures start to lift across the world, consumer habits are expected to have been changed profoundly and permanently by the coronavirus pandemic.  

In the latest part of our series on disruption, we look at three areas that have been boosted under lockdown:

E-commerce

Even shops that haven't had an online store have had to adapt rapidly to lockdown. Almost every part of retail has an e-commerce element these days so it's hard for investors to pick out the opportunities, and lockdown will have inflated the sales - and share prices - of many retailers. Size, scale and service are key factors in this market, which backs the case for Amazon (AMZN) to continue its strong run - but challengers like Shopify are now firmly on fund managers' radars.

Leaders

Shopify (SHOP)

Morningstar Rating: 1 Star/Narrow Moat
Year to Date Return: 130%
Share Price: $918
Morningstar Fair Value Estimate: $238

A recent strong run for Canadian e-commerce middleman Shopify briefly made it the country’s most valuable company, ousting Royal Bank of Canada. Lockdown has been good for the retail disruptor as small- and medium-sized businesses have used its portal to market their wares to stay-at-home customers. Shares have doubled this year, stretching valuations, and Morningstar analysts think this hot stock is now overvalued.

Amazon (AMZN)

Morningstar Rating: 3 stars/Wide Moat
Year to Date Return: 49%
Share Price: $2,756
Morningstar Fair Value Estimate: $2,500

Can the world’s biggest retailer, now nearly 26 years old, still be described as a disruptor? It's a rare example of an early adopter maintaining, and even extending, its dominant position over the years. After a near-50% spike in the share price this year, Morningstar analysts think the shares now look overvalued. Still the company has a wide economic moat, rare in retail, as it has "sustainable competitive advantages that traditional retailers cannot match". 

Laggards

eBay (EBAY)

Morningstar Rating: 3 stars/Narrow Moat
Year to Date Return: 37%
Share Price: $49.54
Morningstar Fair Value Estimate: $46

Like Amazon, eBay has been around a long time and still boasts decent user numbers and profits. But Amazon and Shopify have moved into its territory by targeting SMEs. Morningstar's R.J.Hottovy says: “We still harbour concerns about eBay's ability to retain new users and keep occasional users engaged as Amazon and other online commerce marketplaces continue to find new ways to bring incremental small and midsize business sellers onto their marketplaces”

Groupon (GRPN)

Morningstar Rating: 5 stars/No Moat
Year to Date Return: -58%
Share Price: $20

Morningstar Fair Value Estimate: $48

Groupon has suffered from lockdown because people haven’t been able to use its vouchers for spa treatments, haircuts and the like. Analyst Ali Moghrabi says the company was one of the first movers in “daily deals”, but customer loyalty and profitability has not followed as expected as rivals have sprung up offering very similar products. The share price is around the same level as the IPO price of $20 around nine years ago.

Food Delivery

With restaurants closed and many supermarkets off limits to shoppers, food delivery has become an essential service during lockdown. But it’s a crowded space and one that is constantly evolving, as Just Eat’s takeover of Grubhub this month shows. Deliveroo’s anticipated IPO will be closely watched to see if investors still have appetite for these companies once diners can eat out again.

Leaders

Just Eat Takeaway (JET)

Morningstar Rating: n/a
Year to Date Return: 19%
Share Price: £86.24
Morningstar Fair Value Estimate: n/a

Just Eat’s takeover of Grubhub makes it the largest delivery company in the world (outside China) and the company is spending large sums on advertising to grab market share in this expanding sector. Shares are up a staggering 3,000% since it floated in 2014.

Uber Eats (UBER)

Morningstar Rating: 4 stars/Narrow Moat
Year to Date Return: 11%
Share Price: $33
Morningstar Fair Value Estimate: $48

Uber was in the running to buy Grubhub but was beaten by Just Eat. But Morningstar analysts still think Just Eat will struggle to match Uber in the lucrative US market. Uber Eats is expected to drive much of Uber’s overall revenue growth in the coming years, says Moghrahabi, not least because it already has the drivers, the brand and customer data from its ride-sharing arm.

Laggards

Domino’s (DOM)

Morningstar Rating: n/a
Year to Date Return: -0.93%
Share Price: 317p
Morningstar Fair Value Estimate: n/a

Domino’s is one of the pioneers of home delivery and embraced the smartphone revolution early, being one of the first food companies to develop an app to bring pizzas to your door. Its brand is strong and shares have done well over the long term. But the rise of Just Eat and Uber Eats poses a serious threat – after all, if you can get sausage rolls and sushi delivered to your door, perhaps pizza won’t always be the default choice?

Door Dash (DOM)

Morningstar Rating: n/a
Year to Date Return: n/a
Share Price: n/a
Morningstar Fair Value Estimate: n/a

As-yet-unlisted US firm Door Dash could float this year and while it's too early to say how it will fare as a public company, gaining market share in this space is an expensive business and companies are often loss making for a number of years. The competition is fierce, too, especially now arch rival Grub Hub has been consumer by Just Eat. Door Dash is also backed by SoftBank, whose reputation has been hurt by the bungled WeWork IPO.

Watches and Wearables

The humble wristwatch has now become a step counter, heart rate monitor, and even smartphone alternative. You can now take calls and read emails on some of the more advanced smartwatches and their growing popularity means these high-tech alternatives are fast gaining ground on luxury watch brands. 

Leaders

Apple (AAPL)

Morningstar Rating: 2 stars/Narrow Moat
Year to Date Return: 24.81%
Share Price: $366
Morningstar Fair Value Estimate: $240

When the Apple Watch launched, analysts were sceptical, arguing that it's too expensive and could never match the success of flagship products such as the iPhone and iPad. But sales have held up surprising well, despite it being four times the price of entry-level fitness devices. Morningstar analyst Abhinav Davuluri argues that the Apple Watch should be seen, along with the AirPods, as products that add value on top of the "jewel in the crown" iPhone. He also thinks the Watch is an example of the company's innovation culture still thriving under Tim Cook.

Samsung (005930)

Morningstar Rating: 4 stars/Narrow Moat
Year to Date Return: -4.16%
Share Price: 52,000 Korean won
Morningstar Fair Value Estimate: 63,000 Korean won

Apple arch rival Samsung has also carved a profitable niche from offering high-spec smartwatches priced below the Apple Watch. Its strong brand and reputation for consumer electronics through making phones and TVs mean a move into smartwatches was inevitable. Still, Morningstar analysts think Samsung lacks the loyalty of Apple customers and faces strong competition from Chinese rivals.

Laggards

Fitbit (FIT)

Morningstar Rating: n/a
Year to Date Return: -0.92%
Share Price: $6.4
Morningstar Fair Value Estimate: n/a

Fitbit was one of the first movers in this sector and still has a strong brand, but Apple and Samsung have muscled into this territory, offering higher-end models that also appeal to the fashion conscious. Fitbit floated five years ago at $20 but, after peaking at $50, shares have struggled since.

Swatch (UHR)

Morningstar Rating: 4 stars/Narrow Moat
Year to Date Return: -28.51%
Share Price: SFr193
Morningstar Fair Value Estimate: SFr310

Swatch has a chunky market share and strong brand built up over decades of producing affordable Swiss watches with innovative designs. Still, Morningstar luxury analyst Jelena Sokolova thinks that Swatch is now in direct competition with smartwatch makers and that will drag on sales. Luxury watches should shrug off the threat though: "We don’t think smartwatches could match the 'status symbol' value of a luxury watch given their substantially lower price points."

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