The coronavirus pandemic compressed five years of digital transformation in the U.S. into five months, “Shark Tank” star Kevin O’Leary said Saturday.
What O’Leary calls “the great digital pivot” away from retail presents an opportunity for investors, he said. Retail sales have 50% gross margins, but direct-to-consumer sales have gross margins nearing 100%, O’Leary said at Benzinga’s Stocks & Options 101 Boot Camp, held virtually June 26-27.
“I’ve been working hard on indexing this change and investing in it myself,” said O’Leary, the chairman of O’Shares ETF Investments.
O'Leary On The Digital Pivot: Before the pandemic, a typical American business made 50% of sales at retail, 40% on Amazon.com, Inc. (NASDAQ: AMZN) and 10% direct-to-consumer, he told Benzinga’s Neal Hamilton during a Boot Camp session.
Then came the coronavirus and an economic shift to “America 2.0,” O’Leary said.
“Most of these companies said, ‘I don’t want to give all retail sales to Amazon for one reason,” he said. “Amazon does not give you back your customer. They keep [them].”
With direct-to-consumer sales bringing what O’Leary said are almost 100% gross margins, sales can fall by half without impacting free cash flow, he said.
"What I care about [as an investor] is free cash flow."
O’Leary’s Digital Transformation Picks: Shopify — and companies like Alibaba Group Holding Ltd - ADR (NYSE: BABA), Wayfair Inc (NYSE: W), Crowdstrike Holdings Inc (NASDAQ: CRWD), Twilio Inc (NYSE: TWLO), Docusign Inc (NASDAQ: DOCU) and Zoom Video Communications Inc (NASDAQ: ZM) — are included in an O’Shares ETF Investments index, OGIG.
It trades as OSI ETF TR/OSHARES GLB INTERNET GIA (NYSEARCA: OGIG).
“They are the engine of the digital transformation,” O’Leary said of the companies included in the index. “I wanted a way to invest in the digitization of America.”
With Shopify, businesses keep their customers, he said. “Shopify does not aggregate your customer away from you. That’s way more powerful than Amazon.”
In O’Leary’s view, Shopify could eventually compete with Amazon using a different e-commerce model.
What O’Leary Favors Instead Of REITs: With remote work looking like a long-term shift and commerce moving online, O’Leary said he’s cut his real estate exposure from 30% to 8%.
Between 12% and 15% of the square footage now under lease with REITs and private landowners is unneeded, he said.
“It’s not great news if you’re a landlord — that’s just the office space,” O’Leary said. "We’re never opening up the marginal retail location. Ever."
Instead, the investor said climate-controlled storage and cloud kitchens are two examples of real estate growth areas in 2020.
A cloud kitchen is a cooking facility of about 1,200 square feet that processes orders from platforms like GrubHub Inc (NYSE: GRUB) and is located near areas that are dense with food orders, he said.
“You don’t need a retail location to serve a just-in-time facility. You need a cloud kitchen.”
Why O’Leary Is Behind Equity Crowdfunding: O’Leary joined the equity crowdfunding platform StartEngine in March as a strategic adviser.
The venture capital environment has frozen, O’Leary said.
“If you didn’t close that term sheet pre-pandemic, you haven’t closed it now. These guys have basically stopped doing deals.”
Some hedge funds were "slaughtered" due to being short into a market that fell 40%, he said. And private equity firms have problems in their portfolios too, O'Leary said.
“It’s very hard to get a meeting for a new deal.”
StartEngine allows customers to buy $100 or $1,000 of a deal, essentially funding an equity raise, O’Leary said.
Much like the crowdfunding platforms Kickstarter and Indiegogo came out of the Great Recession, the "Shark Tank" shark predicts equity crowdfunding could do the same in 2021 and 2022 and be competitive with VCs within 36 months.
“It’s so much more attractive if you’re an issuer than to have a VC dictate all the terms.”
The Last Word: O’Leary asked Benzinga’s Hamilton to consider what the pandemic would have done to the economy in the absence of digital technology.
“We would have been screwed,” O’Leary said. “Instead it turned into an opportunity.”
"Shark Tank" judge and O'Shares ETF Investments Chairman Kevin O'Leary, right, speaks at Benzinga's Detroit headquarters in 2018 with Benzinga CEO Jason Raznick. File photo by Dustin Blitchok.
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