5 Platform Businesses For The Next 5 Years
Summary
- The best platform businesses are proven to be able to extract market defying revenue growth, profits and returns.
- The ability to consolidate and extend market leadership and keep out competitors are features that make these platforms worth owning.
- With the recent pullback in a number of high growth platform businesses, a few emerge as candidates worthy of consideration for the next 5 years or more.
- Looking for a helping hand in the market? Members of Sustainable Growth get exclusive ideas and guidance to navigate any climate. Learn More »
The software platform is perhaps one of the most significant creators of investor value today.
What exactly is a platform? Simply put, a platform is an interface where separate groups of users come together to exchange value for the benefit of both groups.
More obvious examples of platforms are those that bring together groups of merchants and consumers, such as Amazon (AMZN). Others bring together consumers and advertisers as is the case with Alphabet (GOOG) (GOOGL) and Facebook (FB).
Apple (AAPL) enables the interaction between software developers and consumers, while Microsoft's (MSFT) Windows platform and operating system could be arguably considered the most successful platform in history, bringing together hardware makers, software developers and consumers.
However, platforms can also facilitate less obvious forms of collaboration such as that between developers and enterprises enabled by Twilio (TWLO) or bond buyers and sellers facilitated by MarketAxess (MKTX).
The large-cap tech businesses illustrate the kind of value creation that is possible if you get the implementation of a software platform correct. I believe Alexander Moazed correctly captures the type of value creation that's possible with these businesses in his description of them as "modern monopolies". Collectively, Alphabet, Microsoft, Facebook, Amazon and Apple have delivered nearly $8T in shareholder wealth, much of it in the last decade.
Why are platform businesses able to deliver such meaningful value and what is the key to that success? One of the unique things about platform businesses is that they bring together 2 sides of an ecosystem necessary to create value.
The act of initially gaining traction is incredibly difficult, because individuals won't transact where there isn't critical mass. For example, nobody will buy from an e-commerce platform where there are insufficient merchants or volume of goods and services in the categories that someone wishes to buy.
Conversely, no merchants will want to invest the time to sell on a platform where there aren't enough users that are interested and willing to buy. Creating critical mass to get initial transactions going is a fairly large hurdle, however once this is done and the platform is away, it's very difficult to displace.
The reason that this is the case is that a competitor has to displace not just one but both sides of the platform at scale and with velocity. If a rival e-commerce platform to Amazon moves too slowly and only attracts a handful of consumers, the merchants won't want to waste their time trying to establish themselves on that platform. Whatever users that are acquired will eventually drift back to the incumbent.
Creating this flywheel of user growth, merchant growth and transaction growth also enables the necessary investments to occur in the platform which preserves existing users and attracts new ones. Winning platforms can invest in new user acquisition, new platform features, service subsidization (through free shipping) or anything else that really makes sense to add additional value. All of this helps to reinforce the advantage of the incumbent, and keep out competitors. In the corporate world, it's the equivalent of the rich get richer.
The Sustainable Growth Marketplace service which I run is full of these are modern day monopolies for exactly this reason. If these businesses can establish a foothold, the path to meaningful long-term profits can be quite substantial.
Here are 5 platform businesses that I believe could be poised to dominate over the next 5 years.
Etsy
Etsy (ETSY) has established a reputation as a platform for delivering fine handcrafts, homewares and furnishings to tens of millions of consumers that are developed by an assortment of merchants.
Source: Etsy Investor Deck, November 2020
The business came to some prominence during 2020 as a result of mobilizing thousands of merchants who created masks during the pandemic, which helped Etsy deliver revenue growth during 2020 comfortably over 100% during the year.
However Etsy is more than just mask related sales. In fact, the business saw more than 100% growth in categories including homewares and home furnishings, craft supplies and beauty and personal care.
Homeware and home furnishings, jewelry, craft supplies and apparel each had $1B or more in GMV on the Etsy platform in 2020. While these may appear to be fairly niche markets, Etsy estimates a market of $100B for specialty items and nearly $250B in online spending all the relevant retail categories which Etsy operates in.
Source: Etsy Investor Deck, November 2020
Furthermore, my expectation is that there will be an acceleration of the trend toward the "decentralization of work" post pandemic. This will stimulate both sides of Etsy's platform. Etsy's buyers will have both more disposable income to invest in home wears and other arts and crafts for the home and also be more motivated to make the investment due to spending more time working from home. Many of Etsy's merchants who have started small side businesses as a "side hustle" will have more time to invest in these businesses and take them to the next level.
The combination of these two factors should lead to greater long-term transaction volume on the Etsy platform. Etsy is also making meaningful progress in further monetization of its platform. Advertising and shipping services now account for nearly 23% of total revenue. I expect this high margin revenue stream to become an increasingly important contributor to Etsy's results going forward.
Etsy is also favorably exposed to several strong long-term trends. The rise of other discovery platforms such as Pinterest (PINS) will continue to increase exposure and awareness for Etsy merchants. Merchants looking to monetize their talents outside of commodity supplier platforms like Amazon will gravitate to and get started on platforms such as Etsy.
While the pandemic delivered Etsy a considerable boost, in my opinion this business still has quite some ways to go.
Fiverr
Fiverr (FVRR) is another business which the pandemic has helped massively accelerate, however one which I also believe has long-term staying power.
Fiverr's platform helps bring together freelancers and contract workers with the businesses that wish to hire such talent. Fiverr competes with Upwork (UPWK) in the space, however Fiverr has by far the faster growth and better market share and is the more dominant platform in my opinion.
Fiverr solves for the inefficiency in contract labor being able to find the best assignment at the best rate, irrespective of geographic constraints. Traditionally, contract labor for hire would be placed through an agency that would have a high degree of reliance on the particular contacts and relationships that that agency had.
However in a marketplace that's now more global in nature with competition for talent, the Fiverr marketplace removes such artificial constraints and allows contract labor to find the best fit and assignment for their talent at any point in time.
Even post pandemic, I believe enterprises, both small and large, will be unwilling to immediately give up the additional flexibility that has come with being able to source contract labor and temporary assignment for gigs rather than having the burden and inflexibility of hiring full-time labor on a permanent basis.
Fiverr delivered 77% revenue growth in 2020. The business grew active buyers by 45% to nearly 3.5M and saw steady increase in revenue per buyer to $205, an increase of 20%.
Source: Fiverr Investor Deck, Feb '21
Fiverr has been making strides to better monetize its platform capabilities. The business has introduced promoted gigs, an advertising stream, which allows freelancers on the platform to pay to promote and highlight their capabilities to interested buyers.
With workers globally having accelerated a shift away from living near centralized places of work, to now performing work on a remote basis, the flexibility to pick up additional freelance gigs and to source work globally irrespective of geographic limitations is something that will only increase over the next few years. In my opinion, Fiverr represents the platform best suited to capture this trend.
Roku
2020 marked a watershed moment for the Connected TV. The Trade Desk (TTD) estimates that connected TV reached 80M households in 2020 while cable TV dropped below 80M households for the first time.
Roku (ROKU) represents a key piece of the push to connected TV. The business provides a platform that helps consumers navigate the myriad of streaming services that have started to emerge and provides discovery for content providers that are looking to push streaming services to consumers.
The streaming platform market has rather quickly whittled down into a two horse race between Amazon's Fire platform and Roku. In early 2020, Roku had a slight edge with roughly 38% of the US streaming market versus Amazons 32% in 2020.
What's at stake is fairly large. Connected TV ad spend is expected to grow from $11B in 2021 to nearly $19B by 2024 according to E marketer. The platforms with dominant market share amongst consumers will be best placed to capture a majority of this spend.
Advertisers are keen to track the shift in user preferences from Cable TV towards Connected TV and ad dollars are accordingly flowing in this direction. Roku's player is a beachhead entry point for consumers into Roku's connected TV ecosystem and consumers have adopted this in a big way. Roku recently reported over 51M active accounts with over 58B hours streamed across those accounts.
Source: Roku Investor Deck, February '21
While the Roku player accounts for the majority of the company's revenue today, Roku's business mix is rapidly shifting towards higher margin software services. Roku receives a certain percentage of upsell revenue from paid streaming content subscriptions transacted on the Roku platform. Roku will also receive a progressively higher amount of its total revenue from advertising, partly due to free content contributed by new streaming services to the platform monetized by ad impressions.
Roku represents a dominant platform in the strategically important Connected TV market. Further, with a foothold into the smart TV ecosystem via Roku's operating system, Roku is well positioned in the ongoing evolution of this market.
Sea
I've long had a personal bias towards MercadoLibre (MELI) as my emerging markets e-commerce and fintech platform of choice, as I recently shared in my article 5 High Quality Growth Stocks For The Pull Back. However, if I had to pick a number 2 candidate, it would be Sea (SE).
I've happened to own MercadoLibre for much longer, though Sea hasn't disappointed in the nearly 10 months for which I have held it. In fact, I've come to like the business so much, that I have "averaged up", on 4 separate occasions over the time, a tool that I've used in the past to accumulate long term wealth creators
The business is one of the dominant gaming, e-commerce and financial services platform companies in Southeast Asia.
While the business initially got its start in the gaming via distribution of titles for the Southeast Asian market from large investor Tencent (OTCPK:TCEHY), Sea has gone on to develop its own set of gaming hits through its Gareena gaming business, most notable among these being the game, Free Fire.
Sea has successfully deployed this cash flow into carving out a dominant niche in both e-commerce and, more recently, digital payments in the region. Sea has been engaged in a fairly cutthroat battle for market leadership in the with Alibaba's (BABA) Lazada business. However 2020 appears to have been the year where Sea has decisively pulled ahead, with dominant positions now in many key Southeast Asian markets including the Philippines, Thailand, Vietnam and Indonesia, among others.
Why is this important? As with MercadoLibre, Sea is increasingly finding that market dominance in e-commerce gives rise to pull through digital payments volume. Sea could also become a monster in the next 5 years. The level of e-commerce penetration in many of the markets in which the business operates are in single-digit percentages.
Sea's progress in 2020 is reflected in very strong metrics that the business has put up. The business delivered revenue growth of 100% year-over-year, with Sea's e-commerce business growing at 178% year-over-year. Sea's mobile wallet traction was also strong, with over 23M users paying for services using Sea's mobile wallet in Q4 alone, representing almost $3B mobile payment with volume.
Source: Sea Investor Deck, March '21
With the e-commerce genie now out of the bottle in many of these markets, and with disposable incomes rapidly increasing, the dominant platform leader will now have the best chance to capture much of the volume as well as ancillary services that come with being the market leader. Based on current momentum, there's a very good chance that over the next 5 years this could be Sea.
Farfetch
Farfetch (FTCH) operates one of the leading, if not the leading, platform for the transaction of luxury goods online. In bringing consumers of luxury goods together with the brands and the boutiques that are looking to sell these, Farfetch is able to solve an important problem for luxury goods buyers and sellers.
In many instances, luxury goods transactions are limited by inventory that is geographically closest to a consumer. That's a problem for consumers, who may not find specific goods that they're interested in, but also for merchants who may not be able to sell luxury merchandise given geographic constraints of the customers they sell to. This problem can be particularly acute in markets such as China where limited selection of merchandise exists in market.
Farfetch solves this problem by providing an online platform for luxury brands to be distributed to a global audience. In the process of doing so, the business has managed to successfully convince large luxury retailers including Richemont, home to brand such as Cartier, Van Cleef and Montblanc to collaborate with it in certain geographies such as China.
Why is Farfetch a platform to be interested in for the next 5 years? The market for online luxury goods has been growing at a rapid rate over the last few years, however growth is expected to be sustained at almost 20% through to 2025.
Source: Farfetch Investor Deck, Nov' 2020
However Farfetch has been growing at a rate significantly above the market, and most recently saw full year revenue growth of close to 40% in 2020. As the dominant online retail luxury goods platform, I expect the business to perform above market for the next 5 years.
Perhaps more significantly, Farfetch's online digital commerce luxury goods venture with Alibaba and Richemont could position the business to capture a significant share of the online luxury goods market in China, a major growth market for luxury goods over the next decade.
Concluding Thoughts
Platform businesses have the unique ability to ride long-term, sustainable, secular growth trends and create significant market dominance.
These businesses can ensure their long-term incumbency and make it relatively difficult for newcomers to dislodge them. This can lead to exceptionally attractive economics and very high returns on invested capital over a long period of time providing exceptionally good returns for investors.
In an environment where many of these businesses have pulled back from their highs by nearly 20% or more, for those investors that are willing to look beyond current market volatility, they could offer significant promise for the next 5 years and beyond.
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This article was written by
I am an investor who is focused on disruptive businesses that are transforming industries lead by visionary leaders with substantial skin in the game. I have spent nearly 20 years in a formal capacity in various investment banking and corporate advisory roles, having attained my MBA with a concentration in finance. This led me toward a path in Venture Capital and working with entrepreneurs building new technology businesses, and I have had the opportunity to not only invest in a number of amazing privately held businesses, but also play a meaningful role in growing several of these early stage enterprises as well. I am now focused on applying my lens of private market disruption and leveraging secular tail winds to the public markets. This was a journey which I started with my public Project $1M portfolio series and which I have deepened with my marketplace service, Sustainable Growth
Analyst’s Disclosure: I am/we are long GOOG, AMZN, FB, MELI, SE, FVRR, FTCH, ROKU, ETSY, TWLO, MKTX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (35)
Surprised that I didn’t see SHOP on your list and don’t you consider PINS to be one of the growing platforms?
