How the world values maritime infrastructure

How the world values maritime infrastructure

Nick Chubb from Intelligent Cargo Systems tries to get his head around Flexport’s valuation in light of the recent $3.4bn Inmarsat takeover.

Last week Inmarsat accepted an acquisition offer, which valued the sat-comms giant at $3.4bn. When I read through the figures another recent transaction came to mind; a few weeks ago Softbank led a $1bn investment in digital freight forwarder Flexport, which valued the company at $3.2bn. How is it that a relatively small freight forwarder with revenues in the hundreds of millions can achieve a valuation that is almost as high as a satellite giant, which provides the backbone infrastructure for the entire maritime sector? Has the world gone mad? Are we in a bubble? Or is there a more fundamental shift in value happening in the maritime sector?

First off, it is worth noting that while they have achieved similar valuations, Inmarsat and Flexport are very different businesses, with different strategies, operating models, and assets. On the surface, this appears to be an apples and oranges comparison, but it raises some interesting questions about how the world values maritime infrastructure. While Flexport plays an important role in the trade ecosystem, its space would quickly be filled if it ceased to exist. Inmarsat, on the other hand, provides critical infrastructure that all ships and aircraft rely on. Without Inmarsat’s GMDSS provision, ships simply couldn’t go to sea and global trade would shudder to a halt. Until 2020, when Iridium’s GMDSS network goes live, there will be no other satellite network in place that can replace this critical function. This may well be an apples and oranges comparison, but if Flexport is a single apple, Inmarsat is an orange tree.

Even comparing Flexport to its peers, its valuation appears bloated. Flexport hasn’t yet broken into the top 25 freight forwarders by global volume, but it is easily in the top 10 by valuation. It is a long way off the likes of DHL and Kuehne+Nagel, but at $3.2 bn, Flexport has a higher market cap than Sinotrans ($2.9bn) and is rapidly closing in on Panalpina ($3.9bn). We frequently see these sky-high valuations attained across the venture-backed startup ecosystem, particularly from those companies coming out of the West Coast of the US.

But is it a bubble? Uber, which made a net loss of $1.8bn last year, was valued at $60bn at its last investment round. The ride-hailing company has recently been tipped to be going public at an eye-watering $120bn and appears to epitomise the argument that tech is overvalued. Every year there appear to be more headlines touting the next dot com bubble, but the last decade has shown us that the lessons of 2000 have been learnt. While there have been a number of notable tech IPO flops in the last two decades (Zynga anyone?), the upper echelons of the Nasdaq are now full of tech companies that have gone public since 2000 and gone on to offer investors exceptional returns. Google and Facebook were both widely ridiculed after bungled public offerings but are today the fourth and fifth most valuable companies in the world (behind Microsoft, Apple, and Amazon).

Indeed, investors appear to be much more patient with tech companies than they are with traditional businesses. Most publicly traded businesses are punished on the trading floor for issuing a profit warning, but from its IPO in May 1997 until the fourth quarter of 2001, Amazon posted nothing but thumping losses. Jeff Bezos’ insistence on growth over profit paid off, in the last quarter of 2017 Amazon posted a net profit of $1.9bn, making more money in a single quarter than it made in its first 14 years as a public company combined. This patience is the same reason that Tesla is currently the second most valuable car manufacturer in the US despite never hitting a production target and rarely posting a profit.

The dotcom days of being able to go public without even having a product are over. Technology investors expect returns, but they are willing to wait a long time to see them. This brings us nicely back to Flexport who have just taken on an investor willing to wait a long time to see a return, a very long time. Softbank, whose investment portfolio includes Uber, WeWork, General Motors, and now Flexport has a 300-year strategic plan. That’s not a typo. 300 years. Their plan is to use the “information revolution” to create “happiness for everyone” and they will do this by finding market leaders in any sector and completely removing any capital restriction to their growth by pouring hundreds of millions of dollars into them.

As far as Softbank and its other investors are concerned, Flexport’s value is not in what it does now but what it will be doing in a decade. Flexport is on a mission to build the “operating system of global trade”. Their vision for the future extends well beyond the likes of DHL or Kuehne+Nagel. This isn’t just about facilitating global trade, it is about a complete and systemic transformation. Beyond the vision for the future, the financials make sense too; in 2017 Flexport’s revenue was $225m, in 2018 revenue more than doubled to $471m. Projecting this level of growth forward, their revenue will overtake Inmarsat’s in just two years time.

That revenue growth is in part driven by Flexport’s ability to attract the expanding number of direct to consumer brands like Sonos and Ring by helping them scale without having to build out complex logistics infrastructure. Working with these small brands has allowed Flexport to fine-tune its customer experience before using its new $1bn cash injection to go after bigger fish. In the digital economy, the winners will always be the businesses that provide the best customer experience and Flexport are leading the pack.

The critical difference between incumbents and disruptors lies in the space between facilitation and transformation. While Inmarsat’s valuation is justified by its role as the facilitator of the maritime economy, Flexport’s valuation, whether you believe it is inflated or not, is justified by its role as a transformative force.

There is a fundamental shift in value happening in the maritime sector. Shipping will always be about moving physical goods around the world, but the value that is being unlocked by the visionaries transforming maritime’s underlying infrastructure into the digital space is enormous.

We could well be in a bubble, and at times it does appear that the world is going mad, but Flexport’s valuation makes perfect sense to me.

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