by InvestorPlace Staff | June 21, 2012 10:20 am
There’s a pretty obvious reason investors and financial media alike are obsessed with finding the “Next Apple.”
Apple (NASDAQ:AAPL) has been the definitive growth play of our generation. Investors who got in on the ground floor and plunked $10,000 down on AAPL shares back in December 1980 would’ve had to wait it out a few years, but had they sold anytime after early 2011, they would’ve been millionaires.
Of course, you didn’t have to start trading when Pac-Man was the new hotness to get a rise out of Apple. Within a few years of Steve Jobs’ return in 1997, Apple was pumping out the iPods, iPhones and iPads that have taken over the technological world and sparked enormous growth in AAPL shares. In fact, investors who hopped aboard when the first iPhone went to launch five years ago would’ve been popping the champagne cork over roughly 400% returns!
However, unless you rode Apple to riches and are ready to retire, you’re likely on the hunt for the next multi-bagger. But where can you find that kind of explosive growth? As part of our discussion about Apple on the occasion of the iPhone’s fifth birthday, InvestorPlace weighs in on seven companies that could end up being the “Next Apple.”
I’m taking a twist on this by embracing the idea of Apple as a disruptive innovator through technology. And just like the iPod disrupted music and e-books disrupted publishing, I can imagine Visa (NYSE:V) revolutionizing banking and how we pay for things — and see explosive growth as a result.
Right now, Visa actually is a technology company. It simple processes payments for retailers, connects debit cards to banks and skims a small fee off the top per transaction. It’s big business as the world moves away from cash and toward plastic. Visa has seen revenues soar almost 50% in the past three years, with 2008 revenues of $6.2 billion growing to $9.2 billion in fiscal 2011! Earnings have exploded from 96 cents a share to $5.16 in the same period.
The biggest growth area for Visa currently is this move away from cash and toward more plastic transactions. But Visa could see Apple-like growth when payments ultimately evolve beyond credit cards and to a true 21st-century banking world. How about banking with your smartphone by scanning checks with the camera or using a chip in the gadget register? Those technologies already exist — they just aren’t widely adopted. And perhaps most interesting of all, there’s nothing saying that traditional banks have to be the ones who ride these methods into widespread use.
Apple has proven how big in scale the consumer electronics revolution really is. There’s a chance that some consumers might not even need conventional brick-and-mortar banking anymore for a large part of their transactions — and a well-capitalized company like Visa (almost $3 billion in cash and short-term investments currently) with a dominant brand in payment processing has a very good shot at disrupting how consumers buy everything from groceries to gas to clothes at the mall.
Of course, Apple itself probably sees the potential of this market and could be developing its own mobile banking and payment infrastructure. But the trust consumers have in Visa-branded credit and debit cards could help this payment processor elbow to the front of the line if this market becomes a reality.
First, my ground rules for the next Apple:
Under Armour (NYSE:UA) is the next Apple.
Consumer growth in the athletic apparel space continues to skyrocket, evidenced by revenue improvements at Under Armour competitors Nike (NYSE:NKE) and Adidas (PINK:ADDYY). All signs point to a thriving market — one that has explosive potential once (and it will happen) the economy rebounds and consumers’ confidence returns. UA has barely moved into the European and Asian markets, and it has plenty of time to find new consumers.
Under Armour is all about product revolutions, as its first offerings proved. The company is relentlessly improving on its brand, introducing ColdGear, HeatGear and everything in between.
Marketing is essential, and football, baseball and lacrosse gear and apparel, as well as soccer shoes and soccer uniforms, are all on the shelves, and there’s an entirely new and eager generation that can be taught to wear the curvy X instead of the swoosh. UA practically invented the “in-store” model for athletic gear, and its goods are everywhere.
With $1.5 billion in sales after only 16 years in business, and an upcoming stock split that should further whet retail investors’ appetites, the company has the legs and wherewithal to make founder Kevin Plank’s visions come true.
Voice and audio solutions firm Audience (NASDAQ:ADNC) is on the verge of a major shift in mobile toward an audio-based interface.
Audience came public at $17 in early May and has since moved to about $20. From 2000 to 2008, the company focused on building processors to improve the voice quality on mobile devices, building a team of world-class auditory neuroscientists.
From 2009 to 2011, revenues soared from $5.7 million to $97.7 million. The company also is profitable, logging $4.2 million in profits for Q1 2011 on revenues of $31.1 million. In all, Audience has sold over 160 million processors.
Audience is getting an enormous boost thanks to its largest customer, Apple, whose Siri program uses ADNC’s noise filtering technology. Other customers include HTC, LG, Sony (NYSE:SNE) and Samsung, and the well should only get deeper as more customers demand voice-command capabilities.
Audience has a strong portfolio of intellectual property — seven issued U.S. patents and 87 pending — that involve critical areas like audio algorithms, audio codecs and amplifiers.
And best of all, the valuation looks fairly cheap right now, too. Deutsche Bank (NYSE:DB) analyst Brian Modoff forecasts the full-year revenues at $131 million and profits of $3.64, which would put a forward P/E of a mere 5 on ADNC’s shares!
With Apple, an uncompromising visionary married first-in-class software with unparalleled industrial design to create an addictive, almost frictionless experience for consumers just as the digital media revolution was taking off. Red-hot growth and remarkable profitability was the payoff.
There’s perhaps no other company that’s even a close analog to Apple, but when it comes to cashing in on the digital future, you’ve got to repsect Amazon (NASDAQ:AMZN). Founder Jeff Bezos, like Steve Jobs, is an uncompromising visionary who takes the long view. Since Amazon’s inception, he has been unshakeable in his (very costly) determination to build an empire, quarter-to-quarter report cards be damned.
Also, like Jobs, Bezos is laser-focused on the consumer experience. When it comes to online retail, Amazon is the best place to shop on the web. It has the largest selection, best interface and, by most accounts, peerless customer service. Is it any wonder Amazon is crippling Best Buy (NYSE:BBY), which is rapidly becoming a mere showroom?
Amazon also is well-positioned on the battlefield for dominance in the Cloud-based digital future. The Kindle e-reader is a runaway success, and early iterations of the Kindle Fire have so far offered the only real alternative to Apple’s iPad. With its vast library of movies and shows, Amazon could yet emerge as the dominant vendor of streaming media.
Meanwhile, Amazon’s “core” business still offers a mountain of opportunity. E-commerce retail sales still represent less than 10% — and perhaps as little as 5% — of total U.S. retail sales. There’s no shortage of market share to grab.
True, where Apple charged premium prices and reaped premium margins, Amazon is all about low margins and scale. Like Wal-Mart (NYSE:WMT) during its epic domestic growth phase, Amazon is all about volume, volume, volume. The prospects for Amazon’s share price in the near term are constrained somewhat by Bezos’s margin-squeezing empire building. But then, remember, he’s taking the very long view.
AMZN earnings are forecast to grow at a 33% annualized rate over the next five years. As Bezos’ empire reaches the frontiers of its ambition, shares ultimately could deliver Apple-like returns.
Solid-state disc drives (or SSDs) aren’t a new technology. So-called “jump” drives or memory cards/sticks are solid state drives, but have been around for years. Within the past two years, however, the technology has been taken to the proverbial next level by making smartphones and tablets perform more like traditional computers, and by making computers perform at previously unthinkable speed … at least in terms of data storage.
Enter OCZ Technology (NASDAQ:OCZ). It makes a variety of hardware and peripherals, but its flagship product is solid-state drives, not just for portable data storage, but as “the” storage device for PCs and laptops. These are superior to traditional disc-based hard drives, since SSDs are less prone to failure simply because they have no moving parts. They’re also much faster than traditional disc-based drives.
OCZ Technology has played a major role in the transition from discs to SSDs for two reasons. For one, it has whittled down the price of solid-state drives to something that’s at least reasonably competitive with disc drives. Also, it has designed and now offers one of the fastest SSD controller (data transfer) technologies available today.
Though few have really noticed the lurking megatrend, solid-state drives are going to be the standard within a couple of years, and are going to give smartphones and tablets some amazing performance and storage capacity.
Tech companies can rise rapidly by hitting the right trend at the right time and establishing dominance. Occasionally one tackles a new market — something unexpected — and seemingly out of nowhere, they’re on top and leading a profitable new industry that seems far from their core competence.
That’s what happened with Apple.
The return of its exiled cofounder, OSX and the iMac helped once-troubled Apple get its mojo back. Still, it remained just another PC maker — albeit a stylish one — until it took two chances, first tackling portable music (with the iPod), then mobile communications (with the iPhone). Those ventures launched Apple into the stratosphere, not computers.
Microsoft (NASDAQ:MSFT) might seem like an odd choice to repeat Apple’s success, but some familiar pieces are falling into place. A PC-era veteran that seemed increasingly irrelevant in a post-PC world, Microsoft is fighting back with Windows 8, an operating system that targets convergence. PCs, tablets and smartphones all run versions of the OS, which is garnering buzz. IDC predicts Windows will overtake Apple’s iOS in mobile market share by 2016. Then there’s Microsoft’s surprise unveil of its new Surface tablets — credible competition for both iPad and notebook PCs.
In the living room, Microsoft’s Xbox has morphed from video game console to disruptive entertainment hub. The gaming hardware has been expanded with Xbox Live, the Kinect motion controller, video streaming and most recently its SmartGlass for mobile devices. TV makers (and certainly Apple, which also is eying the lucrative living room) are realizing there was a wolf in that sheep’s clothing.
With its stock under $30 (half its all-time high), Microsoft has plenty of room for growth — Apple was around $9 (one third of its all-time high) when the iPod was released.
Could Microsoft pull an Apple? Stranger things have happened.
SXC Health Solutions (NASDAQ:SXCI) was Fortune magazine’s fastest-growing company for 2011. In April, it announced it was buying rival pharmacy benefits manager Catalyst Health Solutions (NASDAQ:CHSI) for $4.4 billion, making the combined entity the second-largest independent PBM in the country with $13 billion in revenue and filling more than 200 million prescriptions annually. The deal is accretive to 2013 by at least 50 cents per share and should provide cost savings of $125 million within the first 24 months.
SXC is a company ready to play with the big boys.
Expect further consolidation in the PBM space. In this regard, SXC Health Solutions could be either a buyer or a seller in the future, depending on what kind of deals are available. About the same time SXC Health Solutions completed its deal for Catalyst last April, Express Scripts (NASDAQ:ESRX) was closing its $29.5 billion merger with Medco Health Solutions. The merged business fills approximately seven times the subscriptions annually.
Eventually, Express Scripts will come knocking at SXC’s door, and when it does, the deal will be for a lot more than $100 per share. In the meantime, expect SXCI to continue growing as it transforms the health care industry.
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