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Our “online life” theme was performing strongly over the first two months in Q3, but was subsequently impacted by the correction in the US tech stocks in September. After a strong run-up in the share price since inception, we decided to take some profits.
We sold Mastercard at a 52% profit on 15 September after the stock had rallied strongly and broke its previous pre-pandemic high. As a result, its valuation became stretched with forward P/E ratio hitting almost 45x, which is significantly above the 5-year average. Although the company continues to benefit from a secular shift to cashless transactions accelerated by the pandemic and its Q2 earnings turned out better than feared, the risk/reward proposition turned less favourable.
We also trimmed our overall exposure to US tech names on 22 September. We sold all shares of Alphabet at 43% profit and half of our shares in Amazon at 58% profit. Although from a fundamental point of view Alphabet remains solid, valuation was starting to look stretched with a peak of 32x forward P/E ratio (vs. 24x 5-year average) earlier in the quarter. In addition, the online ads market in general is more challenging, due to its substantial exposure to travel, entertainment, and other sectors of the economy affected by the pandemic. For Amazon, the stock was actually getting cheaper on a forward P/E basis as earnings forecasts have seen upgrades owing to the e-commerce boom caused by Covid-19. Nevertheless, we decided to book some profits as part of our tactical decision to reduce US tech exposure.
Finally, Just Eat Takeaway posted a very strong Q3 update on 14 October. The number of orders accelerated from +42% in Q2 to +46% in Q3, reaching 151.4m orders in the quarter. This demonstrates the strong demand argument for food delivery, as discussed above. Furthermore, the company expanded presence in key countries, including the UK and Canada, and continues to generate strong adjusted EBITDA, while investing aggressively. The announcement caused the share price to jump 6.5% in a day.
The pandemic has significantly accelerated e-commerce penetration. In the UK, the online sales share has jumped from 20% in the beginning of the year to 33% in May. This has come as a direct result of ‘bricks and mortar’ store closures, causing consumers to shift their shopping activity to online channels. After the relaxation of lockdown measures and store reopenings, online sales have moderated. Total online sales penetration decreased to 26% in September. However, this is still significantly above pre-pandemic levels and a 8.5 percentage points year-over-year increase in penetration, far outpacing a 5-year average of 1.5 percentage points increase before 2020. On a year-to-date basis, e-commerce penetration has stayed at an average of 26.2% in the first 9 months of 2020, compared to 18.5% in the same period last year.
Within non-food retail sales, e-commerce penetration has expanded even further, peaking at 44% in April. After moderating during the summer, it stayed at 25% in August. Even as high street footfall started to recover from -81% in April to -42% in August according to UK Springboard data, online sales growth remained high. It accelerated from 31% in April to a peak of almost 80% in June and remained close to 60% in July and August. Thus, major UK online clothing retailers such as Amazon, Asos, Boohoo and Very gained market share and expanded sales in a market that declined 15% YoY in August. Online retailers expect strong e-commerce growth to persist even after Covid-19 citing a shift in new customer behaviour and significant increase in customers buying online products for the first time during the pandemic. We expect e-commerce penetration to persist or even increase again during this holiday season due to the virus-driven consumer unease with crowds and social distancing measures in stores.
Retail sales is not the only category, which experienced a major shift to online channels. Another heavily impacted industry is cafes and restaurants. After a freefall in reservations in March and no reservations throughout April, the recovery started in May as restaurants began to reopen. However, after a slowdown in recovery in July and a peak in September, reservations remained at around -40% YoY on average across the US, Canada, Mexico, the UK, Ireland, Germany, and Australia. This is despite almost 80% of restaurants having reopened, according to OpenTable.
As a result of absent or limited dining out options, people switched to food delivery services. A series of Morgan Stanley surveys of 12,500 consumers in the UK, France, Germany, Italy and Spain highlighted that food delivery demand has been strong since the pandemic unfolded. Around 50% of respondents ordered food online at least once per month. The latest September survey shows food delivery demand remained significantly higher with consumers ordering food more frequently. In Germany, the increase has been the largest, jumping by 19 percentage points compared to pre-Covid. On an absolute level, the UK and Spain are leaders with 55% of respondents ordering food at least once a month, followed by Italy at 48%, Germany at 47% and France at 38%. On a once per week basis, Spain retains leadership with 27%, followed by Italy with 24%, the UK with 18%, Germany with 17%, and France 14%. It seems that French people prefer to cook at home more compared to other European nations. In terms of future intentions, food delivery continues to be popular with 40%-50% of respondents planning to order food for delivery in the next month, especially so in the UK (53%).
In the US, food delivery has also become more popular. A Goldman Sachs survey of 2000 US consumers conducted in Q3 demonstrated that the share of respondents not ordering food delivery at all fell from 42% in Q4 2019 to 37% in Q3 2020. At the same time, the frequency of orders has gone up too. Share of respondents ordering food delivery at least 3 times per month increased from 30% to 35%. One of the barriers to order food more frequently has been high delivery costs.
Past performance is not a reliable indicator of future returns. Forecasts are not a reliable indicator of future returns. If the information is not listed in your base currency, then the result may increase or decrease due to currency fluctuations.
If not otherwise indicated, all graphs are sourced from Dolfin research, October 2020.
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