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Matt’s May Outlook: “The Next Coke”

In our May update, our advisors recommend two consumer-facing companies who could have strong enough staying power to become "the next Coca Cola".

May 22, 2020

During the Great Depression customers continued buying Coca-Cola, enabling the beverage company to grow its dividend payout to shareholders. During the great financial crisis, shoppers still frequented Walmart, one of the few retailers to grow revenue during the drawdown. During economic downturns, some products and services refuse to diminish. While we have yet to see whether the worst has passed from the coronavirus-induced economic shutdown, investors would do well to ask themselves which products or services might fit similar bills today. Two immediately come to mind: Amazon Prime and Verizon Communications’ unlimited data plans.

Over the past 26 years, Amazon, has grown from an online bookstore to one of the largest companies in the world, delighting consumers and shareholders alike along the way. In February 2005, launched Amazon Prime, a subscription service that unlocked “free” two-day delivery for most products for a $79 annual membership fee. Amazon Prime’s membership model revolutionized the way we shop online, eliminating (or, more accurately, concealing) some of the things about e-commerce that consumers hate the most, such as paying more for shipping and offering a wide range of benefits including but not limited to: unlimited streaming of movies and TV shows on Prime Video, ad-free streaming for more than 2 million songs, 1- and 2-day delivery on most items, and free access to magazines, comics, and books.

Even as it has raised the annual subscription for Amazon Prime to its current $119 price tag, the program has exploded. While the company is usually secretive about Prime details, amazon revealed in its 2017 shareholder letter that the platform had grown to more than 100 million members. The following year, Amazon said more people had joined the platform than ever before. The COVID-19 crisis has only accelerated e-commerce adoption, making Amazon Prime a nearly indispensable service for millions of consumers around the globe.

Verizon offers several different “unlimited” data plans, but all come with unlimited talk, text, and data, and subscriptions to Apple Music and Disney+. The more expensive plans come with cloud storage, mobile hotspot data, and HD-quality video streaming as well. Far from consumers planning to cancel or scale back their data plans during the COVID-19 pandemic, traffic across Verizon’s network has surged. In the company’s 2020 first-quarter conference call, CEO Hans Vestberg said:

“Let me talk about the network a little bit … since the outbreak of the pandemic. And you have seen some staggering numbers like, over 200% up on gaming; 10 times up on collaboration tools; 40% up on video; 800 million calls a day, which is twice the amount of what we have on Mother’s Day which is the biggest day of year. All that we have been managing very well with the network. We have built a robust network and we can deliver high quality.”

Given consumers’ increasing reliance on their mobile networks, I doubt many will be shutting off their wireless service any time soon.

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