In athletics, the varsity team comprises the big-time players who are in the spotlight today. The junior-varsity team, meanwhile, comprises the smaller-time players who aren’t in the spotlight today, but have tons of potential and could very well be varsity players in the future.
The same is true in the stock market. The varsity squad is the big-time stocks. The JV squad is the “could be big-time stocks”.
Right now, the varsity squad is the FANG stocks, or Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google (NASDAQ:GOOG). You could also throw Apple (NASDAQ:AAPL) and Nvidia (NASDAQ:NVDA) in there for the bulkier FAANNG acronym. These are companies with $100 billion-plus market caps that are mostly growing at 20%-plus rates and are the dominant players in their industry.
Social media king? Facebook. E-commerce king? Amazon. Streaming king? Netflix. Digital search king? Google. Consumer tech king? Apple. AI king? Nvidia.
But, perhaps the more interesting group of stocks to look at is the JV squad for the FANG stocks. These are companies that are smaller, and either aren’t the kings of their industry yet, or are kings of still nascent markets. But, they have super-charged growth potential, and could one day become a FANG type company.
As is the case with most JV teams in any sport, not all of these JV FANG stocks will make it. But, some will.
Without further ado, let me introduce you to the 2018 junior varsity FANG squad.
Junior Varsity FANG Stocks #1: Square (SQ)
The first member of the FANG stocks JV squad that I’d like to introduced is Square (NASDAQ:SQ).
Payment-processor Square is at the heart of the cashless revolution. Thanks to growth in e-commerce, mobile commerce, and card transactions, hardly anyone is using cash these days. Most people say they use cash less today than twelve months ago and a whopping 80% of people say that they expect their usage of cash to decrease over the next 12 months.
As cash transactions decrease, digital and card transactions increase. Square provides the technology which enables these transactions. As such, the company is built into the backbone of a globally evolving commerce market.
How does Square get huge? Everyone goes cashless, and Square dominates the digital payments processing market globally. In such a scenario, Square could be Amazon big.
Junior Varsity FANG Stocks #2: Roku (ROKU)
Next up on the FANG stocks JV squad is over-the-top streaming device maker Roku (NASDAQ:ROKU).
Just as Square is at the heart of the cashless revolution, Roku is at the heart of the cordless revolution. Thanks to over-the-top services like Netflix and Hulu, entertainment consumption habits are shifting from linear to internet. In this transition, consumers need a way to watch multiple over-the-top services.
Roku provides an over-the-top streaming device player which essentially acts like a cable box for streaming services. Roku makes some money by selling these devices, but the company makes most of its money through advertising and commission revenues through its Roku platform.
How does Roku get huge? Everyone goes cordless, and Roku dominates the over-the-top streaming device market globally. In such a scenario, Roku could get Netflix big.
Junior Varsity FANG Stocks #3: Snap (SNAP)
The third member of FANG junior varsity is social-media company Snap (NYSE:SNAP).
Snap is at the heart of teenage digital media consumption. It is no secret that social media consumption habits are changing from News Feed format to Stories format, and that this shift is happening in especially large quantity among younger consumers. Among that young cohort, it is also no secret that Snapchat and Instagram reign supreme.
Right now, Facebook’s Instagram is far bigger than Snapchat, and recent declines in Snapchat’s user base imply that this will remain the case for a lot longer (if not forever). But, the shift from News Feed to Stories is still relatively young, and Snap does have a unique ability to gain ground in this still developing market.
How does Snap get huge? Everyone goes to the Stories format, and Snapchat splits users with Instagram. In such a scenario, Snap won’t get Facebook big, but it could warrant a $100 billion-plus valuation.
Junior Varsity FANG Stocks #4: Axon (AAXN)
One of the more promising members of FANG JV is law-enforcement technology company Axon (NASDAQ:AAXN).
Everything is going digital. Companies are going digital. Consumers are going digital. Governments are going digital. Even law enforcement agencies are going digital, and that is where Axon dominates.
Axon used to sell smart weapons and body cameras. Now, the company is trying to modernize everything about a law enforcement agency, from weapons to record keeping to monitoring to driving, and everything in between. Add it all up, and this is a potentially huge market that Axon is attacking. Plus, they are doing so largely without competition.
How does Axon get huge? Law enforcement agencies globally modernize their businesses, and Axon continues to squash and/or acquire the competition. In such a scenario, Axon could get really big, really quickly.
Junior Varsity FANG Stocks #5: GrubHub (GRUB)
Another one of the more promising members of FANG stocks junior varsity is food delivery company GrubHub (NASDAQ:GRUB).
First, it was e-commerce. Digital took over shopping, and now, people buy a bunch of stuff from Amazon. Now, it’s online food delivery. Digital is taking over the quick service restaurant space, and now, people are starting to order a bunch of food through GrubHub.
Competition is a big concern in this space. GrubHub has competitors coming at it from all angles such as UberEats and Postmates. But, competition has been a big concern for several quarters now, and all GrubHub has done is report bigger and bigger revenue growth.
How does GrubHub get huge? Online food ordering and delivery becomes a global norm, and GrubHub becomes the Amazon of that space. In such a scenario, GrubHub could get FANG big.
Junior Varsity FANG Stocks #6: Shopify (SHOP)
Perhaps the most promising member of this junior varsity team for FANG stocks is e-commerce solutions provider Shopify (NASDAQ:SHOP).
As all shopping goes digital, the barriers to entry for small and independent retailers become way smaller. If I want to sell shirts as a one-man operation, all I need to do in today’s e-commerce dominated world is make a website, acquire the proper e-commerce tools, do some advertising, and we’re in business.
Shopify provides those necessary e-commerce tools to hundreds of thousands merchants globally. They provide tools for big-time, multi-million dollar merchants, and small-time, start-up merchants who are looking for their first sale. Regardless of who you are in digital commerce, chances are you run some operations through Shopify.
How does Shopify get huge? Decentralization and e-commerce trends continue to surge, and Shopify provides e-commerce tools to millions of merchants globally. In such a scenario, Shopify could get Amazon big.
Junior Varsity FANG Stocks #7: Intuitive Surgical (ISRG)
The FANG stocks junior varsity team would be incomplete if it didn’t include leading medical robotics company Intuitive Surgical (NASDAQ:ISRG).
Automation is happening everywhere. Everyone wants to talk about automated driving, but there is tons of automation happening everywhere else, too. One automation space that is very promising is medical robotics.
This is where Intuitive Surgical is king. The company’s da Vinci surgical system is essentially a surgeon’s robotic assistant. Adoption of da Vinci has been robust, and as the medical robotics space goes more mainstream, adoption rates will only get better.
How does Intuitive Surgical get huge? Automation takes over the entire operating room, and Intuitive Surgical provides robots to do every part of any surgery. In such a scenario, Intuitive Surgical could get really, really big.
Junior Varsity FANG Stocks #8: iRobot (IRBT)
The next member of the FANG JV team is consumer robotics leader iRobot (NASDAQ:IRBT).
Again, automation is happening everywhere. This includes in the consumer realm, where robots and other automated devices are being used to complete simple house-hold tasks.
iRobot is the leader in this consumer robotics space. The company is known mostly for its robotic vacuum cleaner, Roomba, and that product alone has been enough to drive huge growth at iRobot. But, the company is still early in its product pipeline, and more products will likely launch over the next several years.
How does iRobot get huge? Everything in the home gets automated, from vacuuming to window cleaning to lawn-mowing, and iRobot develops the best solutions across the board. In such a scenario, iRobot could become a global consumer franchise with immense value (like Apple, but smaller).
Junior Varsity FANG Stocks #9: Palo Alto Networks (PANW)
The FANG JV team needs a cybersecurity company, and the best one out there is Palo Alto Networks (NYSE:PANW).
Cybersecurity is of growing importance in today’s increasingly digitally connected world. Namely, a bunch of important data is starting to migrate online, and both companies and consumers need to protect that data with the best cybersecurity solutions in the market.
Palo Alto Networks provides those best cybersecurity solutions. The company is so big and so good at what they do that they may as well be a substitute for the entire cybersecurity space. That is why consistent 20%-plus revenue growth is the norm at PANW.
How does Palo Alto Networks get huge? Complex cybersecurity solutions become the global norm, and Palo Alto Networks is behind the best cybersecurity solutions in the world. In such a scenario, Palo Alto Networks could warrant a huge valuation.
Junior Varsity FANG Stocks #10: Fortinet (FTNT)
Considering how big and valuable the cybersecurity space is projected to be over the next several years, this FANG junior varsity team needs more than one cybersecurity company. As such, I’d like to introduce Fortinet Inc (NASDAQ:FTNT).
Fortinet is a really big, really strong cybersecurity company. Revenue growth over the past five years at Fortinet has run in the 20%-plus range, a sign that demand for the company’s solutions is both strong and stable.
FTNT stock is a bit pricey at nearly 40-times forward earnings. But, considering the secular growth prospects of the company and its strong track record of robust revenue growth, a 40-times forward multiple seems reasonable.
How does Fortinet get huge? The cybersecurity space grows exponentially, and Fortinet maintains its second fiddle position to Palo Alto Networks. In such a scenario, Fortinet could be immensely valuable one day.
Junior Varsity FANG Stocks #11: Illumina (ILMN)
Some really cool stuff is happening in the genetics industry right now, and almost all of it is happening at Illumina (NASDAQ:ILMN).
To avoid being too scientific, human genome sequencing has been one of science’s biggest frontiers over the past several years. The implications of such sequencing include everything from identifying diseases earlier to prescribing the right medications to living the healthiest lifestyle.
Illumina is at the heart of all this sequencing. Greater than 90% of all sequencing performed has been generated on Illumina technology, and the company is turning this breakthrough scientific technology into huge profits.
How does Illumina get huge? The implications of sequencing are huge, and that gives Illumina multiple pathways to become a $100 billion-plus company. Thus, all this company needs to do to get huge is continuing to push forward on the sequencing front.
Junior Varsity FANG Stocks #12: Match (MTCH)
One of the lesser known members on the FANG stocks junior varsity squad is Match (NASDAQ:MTCH).
For better or worse, the digital transition has hit the dating world. Instead of going out to meet people of the opposite gender at bars, restaurants or other events, the norm for potential daters today is to go online, swipe a few times and get a match.
Match owns pretty much all the popular services which comprise this digital dating industry. Namely, Match owns Tinder and Match.com, the two most widely used digital dating platforms.
How does Match get huge? Instead of fading, the digital dating trend becomes a global norm, and Tinder becomes a must-have app for any single person. In such a scenario, Match could get huge.
Junior Varsity FANG Stocks #13: Twilio (TWLO)
One of the hottest stocks on the FANG junior varsity team is cloud communications company Twilio (NASDAQ:TWLO).
The transition to the cloud is reshaping the way companies and consumers do everything. This transition has multiple parts, and one of the more critical parts is communication. Indeed, a large portion of IT budgets are dedicated to communications, and as those processes migrate to the cloud, companies will need to spend a great deal on cloud communications software.
This is where Twilio reigns supreme. The company is the market’s go-to cloud communications provider. Twilio hit a road-bump a few quarters back when Uber ditched the service. But, churn since has been limited, and all Twilio has done is grow its presence in the rapidly growing cloud communications space.
How does Twilio get huge? Cloud communication develops into a global norm, everyone outsources those services, and Twilio dominates its competitors to win over majority market share. In such a world, Twilio could be worth a ton.
Junior Varsity FANG Stocks #14: Wingstop (WING)
For diversity purposes, the FANG JV team needed a quick-growing restaurant chain, and that is why Wingstop (NASDAQ:WING) is on this list.
In the quick service restaurant world, it is all about three things right now. One, healthy food. Two, quick service. Three, delivery and digital capabilities.
Wingstop checks off two of those three boxes (it isn’t exactly healthy). But, what it lacks in health, Wingstop makes up for in quality, and consumer don’t seem to care that chicken wings aren’t the healthiest thing in the world (Wingtop comparable sales growth has been hugely positive for a long time now). Plus, the company is building from a relatively small store base, so there is a promising unit growth narrative here.
How does Wingstop get huge? The company keeps opening stores, and grows to KFC size while maintaining strong unit performance. In such a scenario, Wingstop could go from nascent QSR chain to global powerhouse.
Junior Varsity FANG Stocks #15: Etsy (ETSY)
Amazon is the varsity e-commerce giant, but Etsy (NASDAQ:ETSY) is the junior varsity e-commerce giant.
Everyone is migrating their shopping habits towards e-commerce. But, that doesn’t mean everyone is going to Amazon. Instead, it means that everyone is going online to multiple e-commerce platforms.
One of the most promising e-commerce platforms not named Amazon is Etsy. The company has established a niche but loyal following of buyers and sellers which is steadily growing. Moreover, the company is launching seller services to increase seller success rates and boost monetization rates.
How does Etsy get huge? The company turns into a mini-Amazon for arts-and-crafts sellers with a huge global user base and a big moat. In such a scenario, Etsy could be get a mini-Amazon valuation.
As of this writing, Luke Lango was long FB, AMZN, GOOG, AAPL, SHOP, ISRG, IRBT, and PANW.