3 companies disrupting old industries (and themselves)

December 20, 2020

Today I discuss 3 companies disrupting traditional industries: insurance, property and media. In the case of company 2 and 3, they are also disrupting themselves, which represents perhaps the largest challenge in the business world.

All 3 have shown early signs that they are succeeding in their strategies, which could pay off big for patient investors.

Lemonade

Thesis - Lemonade is a new type of insurance company. Founded in 2015, the founders looked for an industry that could be rebuilt for the 21st century with better technology and new distribution. They decided the insurance industry was ripe for disruption, with many of the companies being hundreds of years old and not particularly well-loved. Unlike legacy insurers, which mostly operate through brokers and resellers, Lemonade is a direct-to-consumer brand. They market themselves to younger, first-time purchasers of insurance who are generally under-35. Whilst these customers are generally lower value, they believe by building a relationship with them early they can benefit from a lifetime of repeat insurance purchases. In just a few years, Lemonade has become one of the more popular insurance brands in the markets it operates in. Interestingly, Lemonade is a registered B-corp. As well as shareholders, they consider employees, the environment and society as key stakeholders. To build trust with their policy holders, they run a giveback program - whereby any excess premiums they have over a certain threshold are donated to charities of customers choosing. They believe this builds better behaviour for both them and the customers. They started with renters insurance and have expanded into home owners and more recently pet insurance, showing lateral growth in their addressable market.

Product - With no physical locations and no network of brokers, the product is delivered in a digital first way, through a mobile app and website. In order to calculate a premium and process a claim, Lemonade has two separate chatbots. Lemonade is able to collect data from the customer first hand, a problem legacy insurers have often struggled with when acquiring customers through brokers. With more data on each customer, Lemonade is able to train models that better calculate the risk and price of each premium.

Leadership - Both co-founders have strong entrepreneurial backgrounds. Founder and CEO Daniel Schreiber was previously a senior VP and president at both Sandisk and Powermat. Daniel has a 99% approval rating on Glassdoor.com and 97% of employees recommend working at the company - strong signals of the Lemonade culture. The other co-founder, Shai Wininger, previously co-founded Fiverr, which went public in 2019.

Financials & Performance - In their last quarterly report, Lemonade announced total collected premiums of $188.9m, up 99% year on year. They have 940,000 customers, growing 67% year on year, which highlights their aggressive growth strategy. Premium per customer was $201, up 19%. The loss ratio was 72%, meaning they pay out ¢72 on each dollar. This has declined from 87% the previous year. They company is not yet profitable and does not plan to be for the foreseeable future, as management plans to continue investing in new product lines and geographical markets. With a market cap of $6b in a trillion dollar insurance industry, there should be room to grow.

lemonade stock chart

Zillow

Thesis - Zillow is taking property transactions online. Founded by former Microsoft managers, Zillow became the largest website for listing properties in the US. For many years Zillow had a high-margin, advertising based business that allowed customers to view listings online and charged agents listing fees. More recently, Zillow launched Instant Offers, a service where it makes an up-front offer to buy your home and will later sell it on. This represents a significant change for the business, with high initial costs and more in-home operations. The strategy largely came about due to market pressure from new entrants such as Opendoor that have had success with the model. So in this case, Zillow is both the disrupter (of traditional real estate) and the disrupted (from its advertising model). Given its ownership of the main marketing channels, Zillow does have a strong position to operate from. It can use its data and knowledge of consumer demand to inform its purchasing and reselling decisions. Whilst shareholders initially seemed cautious of the change in strategy, the tide seems to have turned and the stock has soared since its March lows.

Leadership - Zillow was founded by Rich Barton and Lloyd Frink, who have a long working history together. Both are graduates of Stanford and worked together at Microsoft and then Expedia. Rich Barton has a strong entrepreneurial background, having founded Expedia and took it public, founded Glassdoor and led it to acquisition, before founding Zillow Group. He recently returned to the role of CEO having spent a number of years as Executive Chairman and is the driving force behind executing the new strategy.

Financials & Performance - In their Q2 results, Zillow announced $657m in revenues. The business is organised into 3 segments: internet, media and technology was $415m (63%), Zillow Offers $187m (28%) and Zillow Mortgages $54m (8%). This highlights that the advertising business still makes up the bulk of revenues. However, these numbers have been effected by covid-19, where home viewings and purchasing were significantly effected. The company gave guidance that expected Offers revenue to rise to between $260 to $280m in the next quarter. Interestingly, the term “Zillow” is searched in Google more than “real estate”, highlighting the company’s brand awareness.

Risks - The business is going through a significant shift and there is no guarantee it will succeed. Particularly given the strategy change significantly effects the margin profile. However the team seem well placed to execute on the mission and are ultimately moving toward a model that customers seem to like - instant, transparent home transactions. It should be noted Opendoor, their largest competitor, are going public via a SPAC.

zillow stock chart

Disney

Thesis - Disney is perhaps one of the most loved brands in the world. Founded in 1923, for many years they have created characters and stories that have lasted through time. In addition to their own characters, they have acquired Pixar, Marvel, LucasFilm (Star Wars), ESPN and Fox’s assets, making them one of the largest Intellectual Property owners in the entertainment world. They monetise through 4 core segments: studio entertainment (think cinema), parks, experiences and products (think Disneyworld and merchandise), media networks (sports and TV) and finally direct-to-consumer. It’s this last segment that represents Disney’s most recent change in strategy. As streaming becomes a standard expectation amongst consumers, Disney have launched Disney+, its rival streaming product to Netflix. This represents a significant change to Disney, who will now attempt to build one of the largest subscription businesses in the world.

Financials & Performance - In its last quarter, Disney announced revenues of $14.7b, which was down 23% year on year. Splitting by segment; media networks represented 50% of revenues, parks and experiences 17%, studios 10% and direct to consumer 32%. This presents an abnormal picture for Disney, with parks and studios down 61% and 52% respectively, forced into closures and delays of movies due to covid-19. Whilst Coronavirus has clearly provided huge headwinds to Disney’s existing business lines, it has also enabled huge growth in its direct-to-consumer channel. In a special investor day, Disney announced huge numbers across its streaming platforms: 86.8m subscribers on Disney+, 38.8m on Hulu and 11.5m on ESPN+. These numbers beat targets initially set for 2024! They also announced growth into several more international markets and some marginal price increases. Once coronavirus is behind us, expect this company to return to growth.

disney stock chart


Written by Stevan Popovic, growth investor, web developer and founder of this site.