The Tailwinds of Age Cohorts with Network Effects

Where to find opportunities in an over priced market.

I wanted to write about something that time and time again I feel is criminally overlooked in the market right now. It’s something I called age cohorts. Others may call it generational shifts. The understanding that as one generation ages and dies, it is replaced with a new generation that has new ways of thinking and spending.

The internet is such a common place in our lives and has been for the past 15 years that it’s forgivable to believe that everyone has a smart phone, is on social media, and shops online. However this isn’t the case.

A 2018 Marist Survey revealed that only 43% of Americans shopped or purchased online at least once a month. Meaning at that time the majority of Americans DID NOT shop online on a monthly basis.

Among shoppers over 45, that number dropped to 36%. Among those age 60 or older 48% did not shop online.

The point being…older people don’t generally adopt technology.

This begs the question…who will become the older people in 20 years.

Unfortunately guys like me.

Why is this important?

When looking at most tech and e-commerce businesses the question is often asked…where is the growth coming from.

Age Cohorts

In other words….these businesses will enjoy 20-30 years of tailwinds as older shoppers who are unfamiliar with technology are replaced in the business cycle with a new generation that doesn’t even know what clipping a coupon means.

How to apply this?

Consumer goods, consumer internet networks and consumer facing technology are 3 areas where I think you’ll find the most opportunity. Especially is this true when you combine these age tailwinds with network effects. Businesses that require a network/user base to be competitive. Businesses with network effects are particularly entrenched because old habits die hard. Just like our elderly generation did not adapt internet technology, so my generation will be less likely to move off the established mediums and networks we currently use and trust.

As always, look for low/no debt businesses with positive free cash flow and good unit economics if you can find them.

I’m not going to mention any particular names as I would prefer the focus of this brief post to be on the process…not the product.

TLDR?

Here’s a checklist:

1. Does it benefit from the shift from Baby Boomers to Gen Z in the business cycle?

2. Does it have network effects to insulate it from similar businesses popping up?

3. Does it have a good balance sheet?

4. Does it generate free cash flow with low costs of reinvestment?

5. Is the valuation passable?