Big Data is not Old Oil

S&P Global makes a $44 billion Chess move

The biggest acquisition of 2020 will create a data powerhouse. S&P Global will acquire IHS Markit to expand its data empire. S&P Global is well-known for managing the S&P 500 index, which tracks the 500 largest public companies. On top of stock indexing, the company also provides bond ratings and financial data analytics for customers.

But do we need more data?

Last year the London Stock Exchange acquired Refinitiv from the Blackstone Group and Thomson Reuters for $27-billion. This has created pressure for other data providers like Bloomberg and Moody's. Each of these company's sell data to different types of buyers, ranging from corporate development to investment bankers. Investors are hungry for a competitive edge and good data can provide that moat. For example, investors today use satellite images to track logistics and consumer foot traffic. This helps decide which retailer will perform well after the shopping season. But with less in-store shopping, companies need to track online traffic instead.

Regulators will scrutinize this deal

Given the size of this deal I expect regulators to look heavily into the S&P and IHS data businesses. It is tough to measure online monopolies but regulators have already begun scrutinizing Google’s search power because of anti-competitive traits. I expect this deal will take months to complete given its global exposure. The S&P is a massive business and very profitable so I don’t think regulators will overlook any anti-competitive challenges.

Shopify has armed the rebels

2020 is the year of ecommerce. And Shopify continues to capitalize on this retail. In 2019, Shopify’s CEO Tobi Lutke has been arming the rebels against market leader: Amazon. For $29 per month, Shopify has made it easier than ever to build an online store. All you need is a product and content strategy to sell online. This process is simpler than selling on Amazon.

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Shopify stores sold $5.1 billion in products this past weekend. Up 75% year over year. The best selling categories were apparel and accessories, health and beauty, and home and garden. This has been a record breaking year for big and small ecommerce stores.

Different sources have mentioned that hundreds of thousands of new stores have been built this year alone. It has been a record year for e-commerce entrepreneurs. And Shopify has been the main driver for this independent growth. No one else has done a better job to arm the rebels.

Will the company remain a market leader?

Today Shopify is worth $129 billion. But only delivering ~$2.5 billion in annual revenue. So why the market premium?

First, This is a growth company. So investors will not value Shopify based on asset value. Plus there are very few ways to bet big on the future of e-commerce in the public markets.

What does it mean to buy a stock with 642.48 P/E ratio? Not much if you are buying cash flows. The truth is Shopify does not have a competitive advantage. It is a low priced product with many competitors. This past August, BigCommerce went public to capitalize on the new online shopping trend too. I would expect more competitors to enter the space and steal market share from Shopify. We'll find out how loyal the rebels are to Shopify soon enough.

Tech Stocks will revive the IPO market

The hospitality industry is upside down. Restaurants are closed but food delivery is at all-time highs. Hotels are going bankrupt but AirBnB is going public. How did the change market so fast? Because Airbnb had an unbelievable turnaround in 2020.

In May, AirBnB laid off thousands of employees because of high uncertainty during peak pandemic. There was no other way to curb the losses at that time. But now the company has turned around.

Today the company is planning to IPO at $33 billion. The company is reporting net income of $219 million on $1.34 billion in revenue in the third quarter of this year. I recommend reading the S-1 that released this week to learn about the business model.

We need more public companies

We have less than 4,000 public companies today. This is less than half of the number from 1996. Making it tough for public company investors.

Even with the new popularity of SPACs, investors have limited choices. For example, Nikola Motors is worth +$8 billion but produces no products. Why? No reason besides public market investors want to buy electric car stocks.

There is no problem with being public. But it requires more transparency and diligence. Startups need to go public to access more capital. Plus with low interest rates, investors need more equity options to invest in growth. IPOs allow investors to bet big on future growth. I expect more smaller companies to go public in 2021.

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