Wouldn’t it have been great to buy Amazon (NASDAQ:AMZN) stock five years ago when it was trading below $300? You’d be sitting on a 500%-plus return today.
The hunt for the next Amazon is like finding a needle in a haystack. After all, stocks don’t grow six-fold in value over a few years all that often. But stocks do double pretty often, and looking for stocks that could double in value isn’t that pointless of a task.
What should you look for when looking at potential stocks that could double? A strong secular growth narrative. A huge addressable market. Big revenue growth potential. Healthy margin expansion potential. A relatively discounted valuation.
Put all those things together, and you have potential stock that could double.
With that in mind, here’s a list five stocks that could double in value over the next four to five years.
Stocks That Could Double: Netflix (NFLX)
Let’s kick off this list with one of the hottest stocks on Wall Street.
Streaming giant Netflix (NASDAQ:NFLX) has seen its stock power through the $100, $200, $300 and $400 marks, all in the past two years. Believe it or not, there is reason to believe that this run is far from over. Indeed, there is a viable pathway for NFLX stock to power through the $500, $600, $700 and $800 marks over the next four to five years.
Here’s the math.
Netflix has two big growth drivers: subscriber growth and price hikes. In the big picture, Netflix is still in the early stages in terms of both of these growth drivers. The platform only has 125 million subscribers, versus a global internet household population of nearly 1.4 billion (assuming 4.15 billion global internet users and a global average household size of three).
Meanwhile, Netflix only costs about $11 per month, which is dirt cheap next to cable’s $100-per-month cost.
Netflix has about 55 million members in the U.S. Assuming 286 million internet users and an average household size of 2.6, there 110 million internet households in the U.S. Thus, Netflix’s domestic penetration rate among internet households is presently about 50% and growing.
Let’s assume Netflix can get 25% penetration everywhere else in five years. There are 1.4 billion internet households in the world. Take out 110 million for the U.S. and 250 million for China. Netflix’s international addressable internet household market, then, numbers 1.04 billion. A 25% penetration rate implies 260 million international subs.
Add back what will likely be 80 million U.S. subs by then, and you are looking at 340 million total subs in five years. Assuming each of those subs pays $15-per-month and that operating margins run to 30%, then NFLX could do about $32 in earnings-per-share in five years. A big growth 25 forward multiple on $32 implies a hypothetical four-year forward price target for NFLX stock of $800, versus $400 today.
Do I personally think NFLX stock can get to $800 in four to five years? Not really. There are plenty of competitive risks on the horizon over the next several years. But, if all goes well, NFLX stock could indeed hit $800 rather soon.
Stocks That Could Double: iQIYI (IQ)
If you are going to talk about Netflix as a stock that could double over the next four to five years, then you also have to talk about how the Chinese version of Netflix, iQIYI (NASDAQ:IQ) could also double over the next four to five years.
For all intents and purposes, IQ is the Netflix of China. The company streams content over-the-top to paying subscribers. A healthy portion of that content is original content that is exclusive to IQ. Also, the company has 60 million subscribers, and that makes it the biggest streaming platform in China by a mile, much like Netflix is the biggest streaming platform everywhere else by a mile.
Thus, assuming the Chinese consumer and internet landscapes shake out like the U.S. consumer and internet landscapes, IQ should plausibly follow in the footsteps of NFLX, and leverage enhanced convenience and original content to power robust user, revenue and profit growth.
China has about 772 million internet users. That number is rapidly growing. It should approach 850 million within the next five years. Assuming an average household size in China of 3.1, that equates to nearly 275 million internet households in China in five years.
As stated earlier, Netflix presently has a 50% penetration rate among U.S. internet households. It is reasonable to assume a similar penetration rate for IQ in five years, implying 137.5 million subs in five years. Annualized, average revenue per subscriber was around $50 last quarter. Assuming that rises to $75 over the next five years, then IQ is looking at $10.3 billion in revenues in five years.
Also assuming 20% operating profit margins (slightly slimmer than Netflix), that could translate into $2.50 in EPS in five years. A big growth 25 forward multiple on $2.50 implies a four-year forward price target for IQ stock of $62.50, versus $30 today.
Do I personally think IQ stock can get to over $60 in four to five years? Yes. IQ is like a nascent Netflix without any of the big competitive risks. As such, the pathway for IQ to $60 has much more visibility than the pathway for NFLX to $800.
Stocks That Could Double: Facebook (FB)
Social media giant Facebook (NASDAQ:FB) is often looked as one of the lower growth, less exciting companies in FANG.
But that perception makes no sense to me. Facebook reported the highest revenue growth in the whole FANG group last quarter (+50%). Operating margins are expanding and leading to even bigger profit growth. There are huge growth drivers on the horizon through Marketplace, Workplace, Watch, smart home and much more.
Most importantly, though, between Facebook, Instagram, WhatsApp and Messenger, Facebook has 6 billion monthly active users. Only 2.2 billion of those users are “fully monetized” (the Facebook ones). The billion on Instagram are just starting to be monetized, and the 1.5 billion on WhatsApp and 1.3 billion on Messenger have yet to be monetized at scale.
Imagine Facebook does start to monetize fully across its whole ecosystem. The long-term implications are quite profound.
It is unlikely Facebook maintains its current sky-high Facebook platform ARPU (north of $20 on a trailing twelve month basis, and up 31% year-over-year last quarter) on Instagram, Messenger and WhatsApp. But it is very likely that Facebook monetizes those users at at least the same level as Twitter (NYSE:TWTR), which reported ARPU of just under $7.50 last year.
Considering ARPU is just trending up at Facebook, it really isn’t unreasonable to assume ARPU of $20 across all users in the Facebook ecosystem in five years. Considering the whole user base is still growing, it also isn’t unreasonable to assume Facebook’s ecosystem numbers 7 billion in five years.
A 7 billion user ecosystem at a $20 ARPU implies revenues in five years of $140 billion. At 50% operating margins, that should flow into roughly $20 in EPS in five years. A growth-average 20 forward multiple on $20 implies a four-year forward price target for FB stock of $400, versus $200 today.
Do I personally think FB stock can get to $400 in four to five years? Yes. This is one of the most undervalued hyper-growth stocks in the market. The company owns a ton of valuable digital real estate, most of which the company will start monetizing over the next several years. That will push FB stock way higher.
Stocks That Could Double: HUYA Inc (HUYA)
Content streaming is a huge movement. When you say content streaming, most people think of Netflix, IQ and the world of movie streaming.
But movie streaming is arguably the low growth subset of content streaming. The big growth subset is video game streaming. As it turns out, there is huge appetite out there for watching professionals competitively play video games. This market, dubbed esports, is slated to be something bigger than the NBA, NFL, MLB and potentially even professional soccer.
When it comes to video game streaming, there are two top dog platforms. The first, Twitch, is owned by Amazon, has 15 million daily active users who spend 95 minutes a day watching live gaming, and it is king of the video streaming market in the U.S. The second, HUYA Inc (NYSE:HUYA), has more than 80 million monthly active users and it is king of the video game streaming market in China, which is the biggest video game streaming market in the world.
As such, HUYA is the king of a hyper-growth market (China), which happens to be the biggest market in a hyper-growth industry (video game streaming). That positions the company well for huge gains in the long-term.
Think five years down the road. China’s live streaming market is expected to grow to in excess of 350 million monthly active users by then. HUYA currently owns about half of China’s video game streaming market. Assuming HUYA maintains that market share, then the platform could have 175 million monthly users in five years.
Last year, each of those users generated $4 in revenue for Huya, versus under $2 in 2016. Last quarter, the annualized ARPU rate was over $5. Assuming ARPU continues to climb, then HUYA could be looking at $15 in ARPU in five years.
A $15 ARPU on 175 million users implies revenues of over $2.6 billion in five years. Assuming operating margins scale to around 40%, then that could flow into $4 in EPS in five years. A growth-average 20 forward multiple on $4 implies a four-year forward price target for HUYA stock of $80, versus under $40 today.
Do I personally think HUYA stock can get to $80 in four to five years? Yes. Chinese video streaming is a secular growth market. And HUYA is the king of that market. That combination inherently implies huge growth potential ahead for HUYA stock.
Stocks That Could Double: Snap Inc (SNAP)
When it comes to the digital advertising world outside of China, Facebook and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) are heralded as the kings, while Twitter is admired as the industry’s favorite turnaround story.
Often forgotten in the social media advertising landscape is Snap Inc (NYSE:SNAP). The ephemeral photo-sharing app used be the hottest trend in social media. Then, Instagram Stories happened, and everything turned upside down. User growth slowed. Revenue growth slowed. Operating losses widened.
But, Snap is still the most popular app among the all-important teenage demographic. There aren’t really any signs out there that usage is dropping in any meaningful way. Average time spent on the platform remains in excess of 30 minutes per day. And, ever since the advertising platform migrated to an auction model, smaller advertisers have been flocking to the platform, a sign that SNAP has a clear pathway to becoming a go-to digital advertiser for companies seeking max engagement from the youth demographic.
Let’s think five years down the road.
Daily active user growth was 15% last quarter, and is slowing. Assuming roughly 7.5% user growth over the next five years, SNAP could be looking at 270 million users in five years. Annualized ARPU was under $5 last quarter, but it was also up more than 30% year-over-year. Assuming ~25% annualized ARPU growth, SNAP should be able to grow ARPU to $15 in five years.
A $15 ARPU on 270 million users implies revenues of just over $4 billion in five years. Assuming profitability at Snap in five years ramps to current Facebook levels (~45%), then Snap could do about $1 in EPS in five years. A Facebook-level 25 forward multiple on $0.85 implies a four-year forward price target on SNAP stock of $25, versus $12 today.
Do I personally think SNAP stock can get to $25 in four to five years? Not really. I wouldn’t be surprised to see user growth fall into Twitter range soon as Instagram steals mind-share. Also, the monetization ramp will prove difficult as competition in digital advertising heats up. Going forward, then, I think a more realistic four to five year price target for SNAP stock is $20.
As of this writing, Luke Lango was long IQ, FB, AMZN, HUYA, GOOG and SNAP.
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