A few weeks ago, I wrote a post called: Estimating Upside: Part 1 – The Slow Growers. It was the first part of a three part series where I attempted to give my best guess on the reasonable upside for the positions in the Freedom Portfolio if my investing thesis plays out. I divided all of the positions into three groups:
- Slow Growers: Companies that can 2x to 3x over the next 5 years – a 15% to 25% compound annual growth rate (CAGR)
- Medium Growers: – Companies that can 4x to 7x over the next 5 years – a 32% to 48% compound annual growth rate (CAGR)
- Fast Growers: – Companies that can 8x to 10x over the next 5 years – a 52% to 58% compound annual growth rate (CAGR)
The slow growers were already covered in part 1, so now it is time to over the medium growers. For each company, I will list the current-ish market cap as well as what that market cap would look like 5 years from now after a potential 4x to 7x. Market Caps are as of April 26th (yes, it really did take me this long to write this).
Shopify (SHOP) – Now: $144 billion – Then: $577 billion to $1 trillion
There are a lot of ecommerce companies in this “medium growers” group, starting with Shopify. COVID induced lockdowns in 2020 seemed to supercharge ecommerce growth and also, I think, showed that ecommerce was big enough that Amazon (AMZN) couldn’t dominate it all. Many brands wanted to break free and control their own destiny rather than relying on Amazon’s marketplace, and Shopify was glad to accept the mantle of the “rebellion” bravely fighting against Amazon’s “evil empire”. I think the transition from brick-and-mortar to ecommerce is going to continue and I inside the area of ecommerce I think Shopify continues to take market share from Amazon as their incentives are better aligned with their customers and they aren’t trying to compete with them. There’s also plenty of opportunity for overseas expansion. Combine these opportunities with a management team which has proven they can execute and I think hitting that $1 trillion market cap isn’t such a crazy thought.
Verdict: I love Shopify. It’s my top holding and best performing investment. I’m just as thrilled about the future for this company as I was years ago. Happy to hold for years to come.
JD.com (JD) – Now: $114 billion – Then: $458 billion to $801 billion
There are obviously differences in their businesses, but Alibaba (BABA) is a similar enough company to provide a glimpse into the upside that JD still has. Alibaba has a market cap of over $600 billion. It seems perfectly reasonable to think that JD could approach those levels over the coming years considering the different growth initiatives they are undertaking in China and their ambitions to expand outside of China.
Verdict: The ecommerce space in China seems a bit crowded, but with over a billion people, there’s room for plenty of winners. I would be lying if I said I wasn’t concerned over what has gone on with Jack Ma over the past few months, though. Richard Lui has had his own run-ins with the law in the past, so it’s not inconceivable that something could come up between him and the Chinese authorities. I like the upside with JD, but I am closely watching things and won’t hesitate to trim or sell completely if it looks like things are going south.
Sea Limited (SE) – Now: $141 billion – Then: $565 billion to $989 billion
The run of ecommerce companies continues with Sea Limited. With a population twice that of the United States and a GDP that is forecasted to grow at twice the rate of the United States, Southeast Asia is a really interesting area to invest in. While there is a lot of competition here as well, Sea appears to be currently leading the pack in the race to become the top ecommerce company in Southeast Asia. Assuming they can keep that lead, there’s a massive opportunity in front of them. That’s not even counting the fact that they are actually primarily a gaming company and have one of the most popular games in the world right now (Free Fire). The game is helping them make inroads in digital payments both in their domestic markets AND in areas like Latin America. Founder Forrest Li seems to have a lot of ambition and if they can capture even half of that, then hitting a $500 billion market cap seems pretty reasonable.
Verdict: Sea Limited is one of my top holdings and, with the possible exception of Shopify, is possibly the company which I am most excited about in the coming years. There seems to be incredible amounts of upside paired with what seems like an acceptable amount of risk. It’s hard for me to imagine not holding all of my shares for many years to come.
Mercado Libre (MELI) – Now: $81 billion – Then: $324 billion to $567 billion
The run on ecommerce companies wraps up with Mercado Libre. Latin America also has around twice the population of the United States. However, unlike Southeast Asia, the Latin American region seems to have a little more geopolitical uncertainty around it. Between socialism in Venezuela and corruption in Argentina, there’s a lot of negative headlines that have often been coming out of Latin America. In some ways, though, I think that can be framed as a potential positive for Mercado Libre. They have been able to put up incredible growth numbers despite the chaos that has sometimes roiled the markets they operate in. If those situations were to stabilize or even improve, then just imagine what Mercado Libre could do then. Why couldn’t the ecommerce leader of Latin America grow to a $500 billion company a few years down the line?
Verdict: Just like with Sea Limited, Mercado Libre is a top holding for me with high conviction. I imagine there could still be some bumps in the road ahead but I’m ready to weather those short term storms and excited about where the company can go long term.
Skillz (SKLZ) – Now: $8 billion – Then: $34 billion to $59 billion
It’s hard to come up with a great parallel for Skillz to try to judge how large it could reasonably grow. However, if companies like EA and Activision Blizzard can reach $40 billion and $70 billion market caps respectively then a 4x to 7x for Skillz seems reasonable if the bull case plays out. There’s still a ton of risk, though, and I suspect there’s almost as big a chance that it gets cut in half (or worse) over the same time period. Time will tell.
Verdict: I think the potential upside outweighs the downside right now, but I intend to have a short leash on this position. There’s a lot of ways things can go wrong, and I reserve the right to change my mind pretty quickly on this one if it looks like management is unable to execute.
Axon (AXON) – Now: $10 billion – Then: $40 billion to $70 billion
Speaking of hard to find parallels, where is the competition for Axon? More so than most of the other companies in this post, this guess is a complete shot in the dark. However, they recently raised guidance for 2021 and seem to be riding a wave of desire for monitoring police interactions with the public. At the same time, their business is transitioning away from a focus on selling tasers to a stickier and recurring revenue from body cameras, which should help juice their numbers over the coming years. Can the potential leading provider of cloud services for the majority of US police departments be worth $40 – $70 billion a few years down the line? It seems reasonable to me.
Verdict: Axon isn’t the sexiest company, and I doubt they’ll ever put up eye-popping growth rates, but this seems like a really good bet for consistently strong growth for the foreseeable future. If a strong competitor shows up, it might be time to reevaluate, but until then I’m happy to hold for years.
Teladoc (TDOC) – Now: $29 billion – Then: $117 billion to $205 billion
Anybody who follows politics at all knows that one of the hot political topics of the past decade or two has been about the sheer amount of money Americans spend on healthcare and how quickly it has gone up. One of the things that has me excited about Teladoc is because I believe it can ride that desire of saving money in healthcare. There are a lot of big $90+ billion market cap health insurance companies out there, with United Healthcare tipping the scales at over $370 billion. If Teladoc can truly save people time and money on healthcare, then reaching the levels of those big boys seems well within reach.
Verdict: It’s been a rough 10 months or so for Teladoc the stock, but I still believe they are excellently positioned to be the major player in telemedicine in the United States, and I also believe telemedicine isn’t just going to go away once COVID has faded into the background. I’m very content to hold onto my shares for now to see how the company handles the next year or so.
ROKU (ROKU) – Now: $47 billion – Then: $189 billion to $331 billion
We started with a string of ecommerce companies. Now, it’s time for a string of connected TV companies. Roku is first up, and they’ve certainly been flexing their muscle as the operating system of connected TVs lately. They won a battle of wills with HBO and are currently standing up to YouTubeTV. They’ve dipped their toe into original content and are building out their advertising business. The trend of cable cutting seems inevitable, but also is still in the early innings with plenty of runway left. Comcast is a $260B company. It seems reasonable to think that Roku could approach those levels after another half decade of cable cutting.
Verdict: Every once in awhile I will see news about some of the big TV manufacturers and how they have their own impressive smart TV operating system and I get a little concerned over Roku’s future. Then I look at the massive opportunity in connected TV and remind myself that Roku is far more than simply a hardware company. They are in a really strong position to benefit from the move to streaming and I’m looking forward to being along for the ride.
The Trade Desk (TTD) – Now: $36 billion – Then: $142 billion to $249 billion
Advertising is a big business. Alphabet and Facebook are basically just advertising companies. At the same time, there’s a lot of interesting battles being waged right now both between the big tech titans (Apple’s IDFA changes to attempt to hurt companies like Facebook) and between the advertisers who want to break free of the “walled gardens”. The Trade Desk seems well positioned to capitalize on these changes. How big can they get? Facebook and Alphabet are $900B and $1.5T companies respectively, so it doesn’t seem completely unreasonable to think that the Trade Desk could get to around a tenth of their size.
Verdict: Jeff Green seems like a really smart leader and the perfect CEO to lead the Trade Desk through this uncertain advertising future. Whatever advertising looks like 5 years from now, I feel pretty confident that the Trade Desk will be a strong player.
Magnite (MGNI) – Now: $5 billion – Then: $19 billion to $33 billion
I’m not an expert on advertising. I don’t have any good way to determine if a demand side platform (like The Trade Desk) has a higher upside than a supply side platform (like Magnite). But if I’m putting a lot of chips on the “connected TV” trend, then it makes sense that a supply side platform like Magnite would benefit. If the Trade Desk is $36B now, then why couldn’t Magnite get to that level in 5 years?
Verdict: Magnite is a relatively low conviction holding for me right now. It’s still small enough that if my conviction grows, I have plenty of time to add more. As it is, I’m happy to leave it at this size for now.
Zoom (ZM) – Now: $99 billion – Then: $395 billion to $692 billion
There’s really no precedent for a company that solely does video calls getting to a half a trillion dollar valuation. I would also venture to say there’s little precedent for a worldwide pandemic forcing lockdowns and large swaths of the workforce to work remotely. I do think a lot of things will return to normal. The office isn’t completely dead. Business travel isn’t a thing of the past. But I also think a lot has changed. I think plenty of managers have realized that remote work can be effective work, and deals can still be done without a physical handshake. I think families have gotten accustomed to keeping in touch with relatives living far away not with a simple phone call, but with a video call. I think the idea of taking a class remotely is a lot less ridiculous of a proposition than it was just a few years ago. And I think Zoom is excellent positioned to take advantage of this new normal. Zoom has become a verb, and I think that’s a good sign of the prominent position it holds in the minds of consumers and the future prospects for the company.
Verdict: There seems to be a very wide range of outcomes for Zoom over the next 18 months or so. On one hand, life could get mostly back to normal and Zoom gets overtaken by a horde of video conferencing competitors and never again reaches the heights that they reached during the pandemic. On the other hand, they could become the go-to option for a new normal of remote work and reduced business trips while also expanding into areas like remote learning and remote experiences. I tend to think the latter is more likely than the former, but time will tell.
Snowflake (SNOW) – Now: $69 billion – Then: $275 billion to $480 billion
Snowflake is sitting at the intersection of a lot of interesting trends. They seem well positioned to benefit from the explosion of big data and the continued migration to the cloud. If a company like Oracle can be a $200B+ company now, why can’t Snowflake reach about that size in 5-10 years?
Verdict: Eight months after its IPO, Snowflake the stock is still sitting right around the same level it was at post-IPO. The business has continued to grow nicely that entire time, however. I wanted to buy at the IPO but couldn’t stomach the crazy valuation. Now, it is a little more palatable. If Snowflake can continue to put up the nice growth numbers that they have been, and I think they can, then I think that this company can be an impressive out-performer over the coming years. Happy to hold for a long time.
Crowdstrike (CRWD) – Now: $50 billion – Then: $201 billion to $352 billion
It’s a little hard to predict the upside for Crowdstrike because it already seems to be larger than most of its competitors, which was a little surprising for me. Still, cybersecurity seems like it will only get more important in the coming years. If advertising companies can be worth hundreds of billions of dollars, and Apple can make big waves by touting how seriously that they take their customer’s privacy, then why couldn’t a company helping to keep private information safe get to hundreds of billions of dollars as well?
Verdict: I’m high on Crowdstrike right now but I also have it on a bit of a short leash. I got burned badly by FireEye (FEYE), another cybersecurity company, awhile back. I have a hard time personally judging how good of a moat any cybersecurity company has while also being keenly aware that all it takes is one massive security breach for confidence, and any moat they might have, to be completely shattered. If the company should stumble in any way (note: I mean the company’s execution and not the stock price), I would probably give some serious consideration towards trimming the position or selling entirely.
Your Thoughts
What do you think? Am I too optimistic on the above companies? Is a 4x or 7x just patently absurd? Please let me know in the comments if you agree or disagree and, more importantly, why. Thanks!
