Bermuda meets big tech
Atop a mid-ocean volcanic seamount 800 miles off the coast of the U.S. eastern seaboard sits the 21-square-mile island of Bermuda. Known to many for its pink sand beaches and eponymous triangle, the Bermudian economy's dynamic evolution has proven more elusive to those outside its blue waters.
Foundational to Bermuda's post-1970 economic expansion, has been the sophisticated regulatory and attractive tax environment for international business. The island is a globally-renowned offshore financial center, primarily attracting the world's largest insurers and reinsurers.
For many years, Bermuda enjoyed the success of its expanding financial services sector, growing to become the largest provider of Property and Casualty Insurance and Reinsurance to North America. With over 85% of Bermuda's GDP stemming from international business activity, the island's economic well-being is overwhelmingly correlated to these industries' health. From a labor perspective, the international business segment employs a significantly smaller proportion of the Bermudian labor-force, only providing 9.3% of Bermudian jobs in 2019. This disparity is mostly the result of firms opting to seek international talent, primarily employing expatriates moving to the island for work. Although local Bermudian businesses have benefited from the expansion of the financial services sector, the destabilization of the Bermudian economy after the Global Financial Crisis exposed many of the disconnects and inequalities that had been building between Bermuda's international population and the reality of Bermudian lives. In recent years, the government, private sector, and broader Bermudian community have set out on revitalizing the hurting local business ecosystem, spurring a wave of technological and entrepreneurial activity across the island.
Windybank Farm is a historic cog in the Bermudian agricultural industry and representative of the broader technological evolution taking place on the island. The farm operates three primary business lines as the largest supplier of eggs domestically, importing and distributing animal feed, and operating a local vendor market on weekends. In the wake of the COVID-19 crisis, many local businesses built around Windybank's popular farmers market faced incredible uncertainty about the short-term future of their profitable distribution channel. A significant challenge facing Windybank was digitizing the entirety of their product offering and migrating their business online. Without a previous online presence or even a website, I was curious about how the farm navigated these challenges and reached out to my friend and son of the current 3rd-generation owner. To my surprise, the adjustment has been seamless with the use of Shopify and its e-commerce platform. The ease with which Windybank has been able to inventory and sell direct-to-consumer has expanded its business, increased sales by over 25%, and opened new customer acquisition channels.
Windybank's use of the Shopify platform to quickly adapt to the digital transformation required as a result of COVID-19 represents more significant global trends. The Shopify and Amazon ecosystems are imperative avenues for local businesses worldwide to remain competitive as brick-and-mortar retail comes under seemingly insurmountable pressure. With Facebook recently announcing the introduction of Facebook Shops, servicing the digital-needs of small businesses is an attractive area of growth for technology firms.
With Shopify (SHOP) trading at around 55x trailing-twelve-months (TTM) Revenue and -713x (yes, that is a negative) TTM-EBITDA, investors have been willing to pay an obscene premium for companies servicing this growth. Expect continued consolidation and expansion in this sector, with companies like Shopify using their highly valued stock as acquisition currency to facilitate further growth and construct a path to profitability. In addition to highlighting the contemporary necessity for a digital presence, the COVID-19 crisis has emphasized the immense value-creation possible on digital platforms. Before the pandemic, institutional capital largely downplayed the commercial viability of personal Instagram, AirBnB, and other digital accounts, failing to understand them as productive assets. As the world becomes increasingly digitized, pricing mechanisms for likes, comments, reviews, and other signals of values will begin to solidify and provide the basis for investment decisions. Ali Hamed, the founder of CoVenture, speaks to financing novel assets like those above and the wave of opportunities in creating new types of asset classes. For interested readers, a podcast interviewing Ali on CoVenture's investment philosophy: http://investorfieldguide.com/ali/
If readers have more questions about Bermuda or the Investment Society, feel free to reach out.
