US tech break-up and European travel & leisure breakout
Head of Equity Strategy
Summary: In today's equity update we focus on the recently published House Subcommittee on Antitrust that is yet the hardest attack on the four US technology giants Amazon, Apple, Facebook and Google with one of the recommendations being a partial break-up of some of the companies' platforms which act as gatekeepers in the digital economy. Investors should take this report seriously as it is another sign that the trajectory is towards move regulation which eventually will change the game for these technology companies. We also cover the recent strong performance among European travel and leisure stocks up 14% in the last 12 trading days suggesting a change in investor preference.
The House Subcommittee on Antitrust delivered the other day a 449-page report on competition in digital markets and it should have some investors rethinking their views on the big technology companies.
Breaking up US technology companies is on the table
The four US technology companies that have been investigated by the subcommittee are Amazon, Apple, Facebook, and Google (Alphabet’s main profit engine) and how their market power is distorting markets and competition. While the companies differ, the report finds common problems with each company having a platform that serves as a gatekeeper over a key channel of distribution. As a result, these companies can pick winners and losers, and can charge exorbitant fees for access to these distribution channels. Here one mind comes to think about the 30% fee on Apple’s App Store which relates to the ongoing legal fight between Apple and Epic Games which we covered back in August. Secondly, the report finds that these platforms can and are used to surveil competitors and trends and use that information to their own advantage at the expense of their customers using their platform for distribution.
The report has a powerful quote by Supreme Court Justice Louise Brandeis from nearly a century ago which echoes into this age as wealth and income inequality has soared to unprecedented levels in modern time: “We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we cannot have both.”. The report comes with a lot of recommendations with many of them a bit vague but the first recommendation in section a is “Structural separations and prohibitions of certain dominant platforms from operating in adjacent lines of business”. This is directly the potential license to separate business such as Facebook into Facebook, Instagram and WhatsApp, or Amazon breaking up its third-party platform from its own selling etc.
The current equity market concentration in the MSCI World Index has recently reached the second highest level since the index was created only eclipsed by the 1976 peak where IBM alone had a weight around 11%. What is key to understand for investors is that equity market concentration is not a factor that holds back long-term returns of the broader equity market. Peak market concentration is more like a beacon that something systemic is happening and that a structural shift is coming. We are becoming more certain that this structural shift will be extensive technology regulation of those four companies mentioned in the subcommittee report. While the companies themselves will go to great length telling the public that is both wrong and harmful for consumers, our view is that they cannot stop this policy trajectory of regulation and that it will turn out to have positive macro policy outcomes including better competition and choices for consumers and companies.
Is now the time to bet on Europe’s travel & leisure stocks?
European travel and leisure stocks are up 1.6% again today breaking above the local high on 28 August reaching the highest levels since June. The STOXX Travel & Leisure Index is up 14% over the past 12 days. What is remarkable about this rally is that it comes despite of surging Covid-19 cases in Europe and new local restrictions in several large cities. The price action tells us that investors changing their narrative on travel and leisure stocks from that of focusing on the obvious negatives to that of looking past the negatives. In other words, investors are betting on positive surprises going forward and we agree with the market.
Hospitalizations are running much lower in this second Covid-19 wave and treatments are getting better. 2021 will see the rollout of vaccines that will suppress the R0 values of the virus just like we have come to do with the seasonal flu. In addition, the World Economic Forum-backed CommonPass project is moving forward and could create a global health certificate signaling that you have been tested negative or have been vaccinated. This could drastically change the upside case for airlines and travel & tourism. Betting on this segment of the equity market is clearly a contrarian bet and is potentially a multi-year journey. Analyst expectations suggest a negative net income for these stocks in aggregate over the next 12 months but then profits will soar dramatically. The STOXX Travel & Leisure Index is valued at 8.4x EV/EBITDA in FY22 compared to 11.1x for the MSCI World in FY22. Here lies the potential, but the trade comes with great risk and a strict stop loss is recommended. The table below shows the largest stocks in Europe across the industries leisure products, hotels, restaurants & leisure, Airlines.
|Name||Mkt. Cap EUR mn.||Return 5Y||P/E||Return YTD|
|Compass Group PLC||23770.52||25.73||18.74||-35.00|
|Flutter Entertainment PLC||21614.33||94.95||127.25||39.77|
|Ryanair Holdings PLC||14161.80||-0.36||69.30||-13.98|
|Evolution Gaming Group AB||11990.93||1508.34||57.84||146.53|
|InterContinental Hotels Group PLC||8743.31||93.97||-16.44|
|GVC Holdings PLC||6765.93||197.37||18.92|
|La Francaise des Jeux SAEM||6178.85||72.10||37.98|
|International Consolidated Airlines Group SA||5325.26||-65.89||-76.47|
|Deutsche Lufthansa AG||4590.66||-33.21||-53.20|
|Games Workshop Group PLC||3788.77||2414.73||48.38||75.24|
|Wizz Air Holdings Plc||3695.78||71.46||9.36||-16.10|
|William Hill PLC||3259.44||0.28||16.42||49.80|
|Thule Group AB||2928.86||248.33||39.68||35.28|
Source: Bloomberg and Saxo Group
EasyJet has reported preliminary earnings today and reports its first ever loss expected to be in the range £815-845mn almost the same as the previous three fiscal years’ profit combined. The outlook is still very uncertain with no guidance for FY21 (ending 30 September 2021) and the low-cost carrier expects a dismal 25% capacity utilization in the current quarter. Again things are so downbeat that the future can almost only surprise to the upside for these companies exposed to traveling and leisure.
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