Editor’s Note: Yesterday I introduced myself to Whitney Tilson, an investment analyst friend with a fantastic track record. As I mentioned earlier, we’re teaming up for one 2 legends predict 2023 Case. (You can click here to sign up if you haven’t already.)
Today I want to share a great article by Whitney on how to find the big stock winners. Check it out below.
First, let me take a moment to thank my good friend Louis Navellier. Yesterday Louis was kind enough to introduce me to you – the InvestorPlace Readership.
I really appreciate it.
In this article, Louis told you how I found out Amazon.com, Inc. (AMZN) before becoming the trillion dollar behemoth we know today.
And about how I bought …
These investments were one of the reasons I was able to grow my hedge fund from $1 million in assets in 1999 to over $200 million at its peak.
In today’s essay, I’ll show you exactly how I discovered these moonshots long before they became the mega-cap blue chips we know them as today.
First, let’s look at Apple.
The “network effect” at work
When I bought shares for a split-adjusted $0.35, legendary founder and CEO Steve Jobs had just returned to the struggling company that recently launched its iMac desktop computer. That was years before iPods, iPads, iPhones, AirPods, and the App Store even existed.
But I knew Apple was special back then for several reasons:
- It had (and continues to have) a base of extremely loyal users.
- At that time, 50 million homes in the US did not have a PC (not to mention hundreds of millions of homes abroad). These folks were significantly less tech-savvy than average, which impacted Apple’s strengths: products are easy to set up and easy to use.
- Apple has a long history of creating stylish, innovative products that set it apart from its competitors and allow it to command a premium price. This is still the case today and we continue to see this with every new product Apple develops.
- The company’s balance sheet was pristine, with a huge cash position, low debt, and a “lightweight” business model with low inventories and capital expenditures.
At the time, Apple had more than $4 billion in cash and short-term investments and $819 million in long-term investments, offset by just $300 million in long-term debt. That corresponded to more than two-thirds of the share price.
Also, Apple had the ultimate “wild card” in the form of Jobs, who was a genius and a visionary… and who took the lion’s share of the credit for Apple’s comeback.
Sadly, Jobs passed away in 2011, but Apple continues to do a great job.
The iPhone basically nailed the coffin of its top competitor, BlackBerry Limited (bb), whose market cap has grown from $64 billion when Apple released the first iPhone in 2007 to around $3 billion today.
The iPhone completely changed the game, putting computers in the pockets of millions of Americans that let them use social media, send email, stream videos, and play games wherever they wanted.
Apple is the prime example of the “network effect”: the value of its products and services increases with the number of people using them.
Think of the App Store. Instead of hiring hundreds of thousands of developers to build apps, Apple has encouraged outside developers to build apps for its users – allowing its ecosystem to grow exponentially.
As more users download apps, more developers want to create apps for those users, and so on. That’s why App Store revenue has grown from $39 billion in 2017 to over $85 billion in 2022.
That is What do I mean when I say these companies are hyper-scalable.
It was the same with Microsoft…
How MSFT unlocked hyper-scalability
I first bought Microsoft in mid 2010 before it became a 17 bag device.
Despite controlling more than 90% of the world’s operating systems and posting rising profits, the stock has fallen sharply.
Investors feared that Microsoft would lose search engines to Google and lose personal computing market share to Apple. Also, the hardware business was struggling.
But if one withdraws its nearly $40 billion cash pile, MSFT shares are trading for just eight times earnings. As I told a Reuters reporter at the time, “That’s insanely cheap for a company of this caliber and market position.”
A few years later, Microsoft transitioned to a software-as-a-service (SaaS) model, which meant permanently charging a few dollars a month for access to the Microsoft Office suite.
This has allowed Microsoft to become extremely hyper-scalable: It didn’t really cost the company anything more, whether it had 1,000 or 1 billion subscribers.
And like Apple, as more people started using Word and Excel, others wanted to share compatibility, thus taking huge advantage of the network effect.
These powerful forces propelled MSFT shares higher, and in 2019 Microsoft Apple joined the club with a $1 trillion market cap.
Netflix has embarked on a similar path to stardom as Microsoft…
I was wrong about NFLX…before I was right
At the turn of the century, Netflix had just 400,000 subscribers. Today, that number has grown to nearly 233 million… a staggering increase of nearly 58,000%. Just look…
In the process, Netflix has taken Blockbuster Video out of business entirely. (Ironically, in 2000, Blockbuster had an opportunity to buy Netflix for $50 million, but it failed. A decade later, Blockbuster filed for bankruptcy.)
But as we’ve seen at Apple and Microsoft, Netflix’s rise hasn’t been smooth either. In an unfortunate strategy, the company separated its DVD-by-mail business from its streaming business in 2011 and gave it a new name — Qwikster — forcing people to subscribe to it separately.
Netflix customers were outraged — the company lost 800,000 subscribers in that quarter alone — and in less than a month, CEO Reed Hastings reversed the decision. But the damage was done … Netflix grew from 30% year over year to just over 10% for three quarters. Shares fell from $43 to less than $10.
I was short on Netflix back then and even published an article called “Why We’re Short on Netflix”…
Which prompted Hastings to publish an article of his own entitled Whitney Tilson: Cover Your Short Position. Now.”
Hastings and I got in touch via email and he invited me to his home in California for brunch, where he made it clear that I was looking at Netflix from a completely wrong perspective.
I’ve been looking at how many people are paying $8 a month and trying to figure out how much each subscriber is worth. Instead, Hastings explained that Netflix’s streaming platform was already built … and is now enjoying the network effect as more people use it.
Since Netflix paid a fixed amount for its content, it cost Netflix next to nothing to add a new subscriber. Each new subscription was almost a pure profit.
I immediately closed my short position and, after the stock fell sharply, switched to Netflix shares. I was watching CNBC on the very day that Netflix bottomed after the stock plummeted in 2011, and predicted it would be Amazon in the decade to come, whose stock has soared 1,000% over the past decade are.
Turns out I was way too conservative: NFLX stocks went up 90x in the next nine years!
A common trait
Apple, Microsoft, and Netflix all have one thing in common: they are extremely “hyperscalable.”
To understand what I mean, take a look at the table below…
As you can see, this hyper-scalable model has resulted in massive revenue growth for all three companies over the last several years…
This, in turn, has resulted in tremendous returns for shareholders over the same period…
I constantly talk to people who are upset because they haven’t invested in Amazon, Apple, Microsoft and Netflix…
Everyone wishes they had had the opportunity to invest in these stocks back then. But I believe investors currently have a similar opportunity to make fortunes in the markets.
I think people who go for it To the right Today’s stocks will look back on the volatile market of the past two years and see it as one of the best things that has ever happened to their portfolio.
That’s why I’m teaming up with my friend Louis Navellier, an industry legend and billionaire wealth manager who has found 18 different 100 baggers over the course of his career. We’re putting the finishing touches on a presentation in which we explain how an upcoming event could trigger a millionaire wave in the markets.
Louie and I will be sharing the details of our big prediction with you during our event – and how it can benefit you 2 legends predict 2023 Event on Tuesday 23 May. Since you’ve already signed up, you don’t need to do anything else. We will send you a link to the event as soon as it is available.
Louie will be back with you tomorrow with a special piece discussing first-quarter earnings season and a big catalyst that could propel two tech giants higher.
sincerely,
Whitney Tilson
Editor, Empire Investment Report