Talibs Weekly Email - Last of 2020
💻Amazon steamrolling competition, 🏡OpenDoors Cash burning & 🎙️ Top Podcasts
Good Morning
Hope everyone is having a great holiday break. My apologies for the delay in missing the last 3-4 weeks as I’ve prioritized a few other things but looking forward to changing things up in the new year.
I hope to re-brand this newsletter in 2021 and opt for a bi-weekly frequency with an audio component. Thats the goal so crossing fingers to get this sorted sooner than later.
Other than that - I want to thank everyone for the messages, podcasts, articles or book recommendations. Its been incredible to keep this going and share the learning all together. Over the entire year; there have been a few quotes through the podcasts/articles/tv shows I’ve read/watched that I feel resonate with me and I’ll share them here
“Be Curious, Not Judgmental” - Ted Lasso, Apple TV Show
“Time is a non-renewable resource, money is renewable” - Tim Ferris
“Resentment is like drinking poison but expecting the other person to die” - Not Sure
“Pain is knowledge rushing in to fill a void with great speed” - Jerry Seinfeld
Wishing you guys the very best for 2021.
Cheers
What I’m listening to as I write this weeks email
Tweet that got me thinking
💻WSJ: How Amazon Wins: By Steamrolling Rivals and Partners
🏡Bloomberg: Opendoor Faces an Expensive Path to Profitability in Real Estate
🎙️Top 5 Podcasts of the year
💻WSJ: How Amazon Wins: By Steamrolling Rivals and Partners
TLDR: Amazon has grown so large that they are able to undercut smaller businesses to serve the customer no matter the size, % profit or costs.
🤑How big is Amazon? Amazon has a market valuation of $1.6 Trillion and hires more than 1.1 million employees.
👆The Ethos: Bezos has consistently stressed the importance of putting customers first and keeping a startup mentality. His focus has been on customers, avoiding proies , adopting outside trends and making faster decisions.
To keep customers happy, which Mr. Bezos has long said is Amazon’s fixation and growth strategy,
💸 How do they do this? In lament terms, copying and dominating. Amazon hasn’t technically been the #1 in the market but with their service; they have been able to utilize search tools/products to see where trends are going.
👟Allbirds: Amazon set its sights on Allbirds, the maker of the popular shoes using natural & recycled materials. They launched a shoe called “Galen” which looks identical without using the environmentally friendly materials and sold them for less than half the price.
Wayfair Story: Amazon decided to compete with Wayfair; they had a team called the “Wayfair Parity team” which studied how Wayfair operated; sold and delivered the bulky furniture. They struggled to find Wayfair’s suppliers; as Wayfair was buying items from manufacturers and rebranding them to mask their identity.
Shopify: This year, Amazon has focused their attention to Shopify. Amazon has created a secret team called “Project Santos” to replicate certain elements of Shopify’s business model. Amazon has noticed that many third party sellers were defecting to Shopify because of the increasing fees from Amazon, which on average collects 30% of each sale on its platform. (19% - 5 years ago).
History? Amazon vs Diapers.com
What happened? Amazon had set up a team to focus on diapers.com after the e-commerce company had gained significant traction and were able to deliver bulky packages of diapers so quickly. Amazon decided to zero-in and decided to under-cut diapers.com resulting in a loss per sale. They were essentially selling their product below cost to gain market share.
Why go after Diapers.com - This was a market that Amazon coveted because it was filled products with high margin complementary products (baby formula etc).
End Result? The company felt it had no choice but to sell itself because it couldn’t compete with what Amazon was doing and survive. Amazon bought them in 2010 for about $500 million and in 2017 - they shut down diapers.com.
💭My Thoughts: Amazon has long had this history of dominating competition but this article takes a very strong side on Amazon “copying products” based on their searches and utilizing their marketplace platform. Here’s another thought; stores have been doing this for years by initially selling third party designer products only to realize what actually works and what doesn’t - they then utilize the same manufacturer to create a replica product with a different name.
🏡Bloomberg: Opendoor Faces an Expensive Path to Profitability in Real Estate
🏡What is OpenDoor? The company had raised $1.3 billion from Venture capitalists by promoting their thesis that they could re-shape the U.S housing market to work better for consumers. Their method of high volume house flipping has proved popular with home-sellers and inspired copy cats such as Properly in Canada. Recently, they went public through a merger which allowed them to raise $1 billion.
💰Business Model: They are built around the premise that many people are willing to accept a smaller profit if offered a quick transaction that allows them to avoid hiring a broker, agent, having open-houses and waiting on the buyer. Essentially they’re banking that their customers values time > money.
💸A little bit more? The company uses algorithms to come up with an offer within hours and, if the owner accepts, buys the home, makes light repairs, and puts it back on the market. Unlike traditional flippers, Opendoor isn’t trying to buy low and sell high but seeks to profit by charging sellers a fee—usually a 6% to 9% commission—for simplifying the process.
❌So how is it burning cash? Opendoor has to estimate both how much a home will be worth in a few months and how long the resale process will take. The second part is crucial, because interest payments, property taxes, and insurance premiums accrue as long as it holds on to a property. Last year it lost $339 million on revenue of $4.7 billion.
💸Profit Margin? Opendoor’s profit margin was less than 1% on homes sold in 2019, a figure that includes interest expense. This excludes the cost of acquisition and fixed salaries. The company has completed 80,000 transactions over the past six years and lost $989 million over the same period. Read the investment presentation here (its visual)
💻Does it have any competitive advantages or proprietary technology? The company doesn’t appear to have proprietary technology nor a competitive advantage. However, there are details on how they find and value properties here. Its utilizing large copious amounts of data through machine learning and optimizing the process.
Opendoor focuses on the middle of the market and does not make offers on distressed or luxury houses because their prices are not predictable.
🏘️New Business: The company plans to expand into more profitable business lines; the company is experimenting with fronting homebuyers cash to make no-contingency offers in competitive markets and considering homeowners insurance, warranties and other high margin products. The increased growth will allow Opendoor to negotiate better rates on everything from interest rates + supplies.
💭The founders theory: Their mantra has been that Customers will want to deal with Opendoor for many things once its earned their trust. They want to monetize the entire ecosystem.
💭My Thoughts: This is an interesting company but they are burning and excessive amount of cash to stay afloat. Chamath had recently took this company public via SPAC and his one pager on the company is here. Its an interesting read as an investment thesis (purely qualitative at this point). However, given current market conditions - I would think the low interest rates would help them significantly as they’ll be able to borrow and hold at lower rates. This allows them to hold properties for slightly longer if needed (gives them that extra leverage).
The value prop optimizes for time and time is non-renewable. A winning formula here.
🎙️Top 5 Podcasts of the year
Over the year, this newsletter allowed me to share my weekly podcast recommendations. I’ve outlined my top 5 podcasts this year
Tim Ferris with Jerry Seinfeld
“Pain is knowledge rushing in to fill a void with great speed” - Jerry Seinfeld
A great conversation with Jerry Seinfeld on how he prepares his daily routine and writing jokes. He believes in time-boxing activities and setting limits for writing/tasks and thus forces one to have focus/concentration for an allotted time.
How Khan Academy was founded and why it still operates as a non-profit even when the demand for ed-tech has grown significantly. Salman Khan talks about the early day struggles, his intention keeping Khan Academy always free & as a non-profit entirely, meeting Bill Gates and the pure satisfaction he gets from his role.
This is a must listen to anyone trying to understand how the US government was able to raise $2T in April and how the entire system seems so absurd. The $2 trillion stimulus rescue package is being paid for by investors (Funds etc), as well as the Fed making sure everything runs smoothy and interest rates remain low
The Pomp - Chamath Palihapitiya
Chamath Palihapitiya is the CEO of Social Capital, the Chairman of Virgin Galactic, and the owner of the Golden State Warriors. This was a fascinating conversation on Chamaths views on structural issues in health/economics, investing in bitcoin, industries ripe for future and his ideas on SPACs. (Hint - Read his investment thesis)
This podcast was super interesting because of the rise, decline and rise of Fitbit. James Park talks about how the product was innovated (Thank you old technology + Nintendo Wii), how he faked it till he made it, dealing with suppliers in Asia, management styles and how Apple Watch was not taken seriously at first and then bit them in the butt. Good Product overall —> Community + Data = Win.
Books of 2020
Here are my books to read/finish for the next while
Completed
Educated by Tara Westover (9/10)
Loonshots by Safia Bahchall (8/10)
Range - David Epstein (8/10)
American Dirt by Jeannine Cummings (9/10) [fiction]
We The North - Doug Smith (8/10) - Nice history from a Raptors beat writer
Promised Land - Barack Obama (8/10) - Great perspective;
Tanking to the Top - Yaron Weltzman (7/10) (Philadelphia 76ers “The Process”)
The Color of Money: Black Banks and the Racial Wealth Gap (8/10)
If you’re looking for books to get, I would suggest checking out bookdepository.com or thriftbooks.com (both are cheaper than amazon at time)