In early 2013, former money manager and CNBC personality Jim Cramer coined the FANG acronym. The whole idea was that investors should put their money to work in companies that represent the future. Between Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google (NASDAQ:GOOG), FANG represented the future by being the internet’s unchallenged behemoths.
The trade worked wonders. FANG stocks have soared since 2013. Google is up more than 100% since then. Facebook is up nearly 200%. Amazon is up nearly 400%. Netflix is up a whopping near 700%.
But, there are murmurs that FANG is starting to break down. Mostly due to regulatory concerns and perhaps full valuations, the market has fallen out of love with FANG. All four stocks are more than 5% off recent highs, while Netflix is in correction territory and Facebook is in bear market territory.
For the record, I think FANG is alive and well. But, I also think it is time for investors to pick a new high-growth acronym to replace FANG. After all, FANG was established to represent the future. But, if anything, FANG represents the present in 2018, not the future. So, if you are looking to put your money to work in companies that represent the future, I think there is a better high-growth acronym out there for you than FANG.
That acronym is STARS. Broadly speaking, STARS represent a class of market-leading internet service stocks that build upon, add complexity to and enhance the internet economic foundation that FANG established. In simple terms, FANG established the foundation for the digital economy. Now, STARS is building upon that foundation, and it’s making the digital economy better than ever.
Which five stocks comprise STARS? Without further ado, let’s take a look at these new FANG stocks.
Current Valuation: ~$16B
Long-Term Target: ~$100B
The Short: The digital commerce landscape is becoming increasingly complex and diversified, and as complexity and diversity only grow over the next several years, retailers of all shapes and sizes will turn to e-commerce enabler Shopify (NYSE:SHOP) to simplify and streamline the e-retail experience.
Rationale: Over the past decade, Amazon has pioneered the era of e-commerce, and by most metrics, the e-commerce train is only accelerating. Because consumers are so digitally engaged, any retailer that hopes to survive today needs to have a digital presence. But, setting up an e-commerce shop isn’t as easy as it seems, and that has created a huge barrier to entry in the e-retail market, which has resulted in unusually large e-retail sales concentration (Amazon controls 50% of the U.S. e-commerce market).
Inevitably, as the e-commerce market becomes more wholesome and inclusive, this will change. Shopify is pioneering this change by selling e-commerce solutions that enable anyone to sell anything online. Through a subscription service, Shopify gives retailers the tools they need to build a successful e-commerce shop. In so doing, Shopify is enabling a new generation of online sellers who have, until recently, struggled to compete with Amazon.
This trend is still in its early stages. Shopify only has 650,000 merchants on its platform, versus 65 million active business pages on Facebook. The company also only controlled 1% of global e-commerce sales last year. Over time, those two numbers will increase dramatically, and SHOP stock will head way higher.
With respect to the STARS outline (internet service stocks that are enhancing the FANG internet economic foundation), Shopify is building upon, adding complexity to and enhancing the e-commerce foundation that Amazon established by democratizing e-retail so that anyone can do it.
Numbers: The global e-commerce market measured $2.3 trillion last year, and is projected to measure $4.5 trillion by 2021. At that growth rate, the e-commerce market should easily get to $8.5 trillion in a decade.
As the e-commerce market grows in scale, it will look more like the traditional brick-and-mortar commerce market. In the traditional commerce world, the top 10 retailers account for 7% of global sales and the top 250 retailers account for 20% of global sales. Thus, 80% of retail sales out there are accounted for by small-to-medium-sized retailers.
Presumably, those small-to-medium-sized retailers will use Shopify tools as they migrate to e-commerce. An 80% share of e-commerce sales for Shopify is tough to project and, frankly, unreasonable given the competition. But, a 10% share is a reasonable projection, versus 1% today. Under that assumption, I see Shopify as a $15-to-$20-billion-revenue business with sky-high margins in a decade. That should flow through into roughly $5 billion in annual profits, and a normal 20 multiple on that implies a $100 billion valuation.
Trade Desk (TTD)
Current Valuation: ~$6B
Long-Term Target: ~$40B
The Short: Programmatic advertising is the future of digital advertising, and as the whole digital ad landscape switches to buying ads with machines, programmatic advertising leader The Trade Desk (NASDAQ:TTD) will soar.
The Long: Over the past decade, Facebook, Google and others have pioneered the era of digital advertising. Much like e-commerce, the digital advertising train is only accelerating as consumer engagement becomes more concentrated in digital channels than ever before. But, tracking these digital ads isn’t easy. With so much money going toward digital advertising, advertisers are in desperate need for a solution to optimize their huge spend.
Insert Trade Desk. TTD is a leading player in the programmatic advertising market, which is essentially using machines to buy ads based on analytics, big data and algorithms. This market has seen explosive growth recently as advertisers pouring billions of dollars into digital ads want to optimize spend. Explosive market growth is a big reason why TTD stock has soared over the past year.
This rally is far from over. Programmatic advertising is still in the early stages of its hyper-growth narrative. Over the next several years, advertisers will increasingly use data and algorithms to manage, analyze and optimize ad spend across all ad channels, from web to mobile to TV to audio. As this transition plays out, Trade Desk will become a much bigger part of the global advertising model. As this happens, TTD stock will soar higher.
With respect to the STARS outline, Trade Desk is building upon, adding complexity to and enhancing the digital advertising foundation that Facebook and Google established by leveraging data, analytics and algorithms to optimize digital ad spend.
The Numbers: The global digital advertising market measured just over $230 billion last year. Gross ad spend through Trade Desk measured just $1.5 billion. Thus, Trade Desk’s share of the global digital advertising market is under 1%.
That won’t remain true for long. Programmatic advertising is on a secular growth track, and TTD is at the forefront of this trend. Thus, it is quite likely that within the next decade, Trade Desk grows its global digital ad market share to 5% or more. Assuming the global ad market grows to $1 trillion by 2025, and the digital ad market comprises 60% of that market, a 5% share would imply $30 billion in gross ad spend for Trade Desk. A 20% take rate would lead to $6 billion in revenue. Assuming opex rates normalize with big growth, that should flow into $2 billion in net profits.
A normal 20 multiple on that implies a long-term valuation target of $40 billion. That is more than a six-fold increase from today’s valuation. That is big enough growth to easily qualify TTD as one of the new FANG stocks.
Current Valuation: ~$130B
Long-Term Target: ~$400B
The Short: The importance of visual information and solutions is only growing in today’s visual-centric world, and Adobe (NASDAQ:ADBE) currently is and projects to remain the king of the visual cloud.
The Long: The cloud and big data revolutions are in full swing. Everywhere you look now, enterprises of all shapes and sizes are migrating their data to the cloud, and using machine learning and other AI techniques to turn that data into actionable insights. At the current moment, this market is dominated by the headline names like Amazon, Google, Microsoft (NASDAQ:MSFT) and Salesforce (NASDAQ:CRM).
But, there is an often forgotten cloud king called Adobe that may actually have the biggest growth potential of all of them. Why? Because Adobe dominates the visual cloud, which is a critical and growing part of the cloud that no one else is really tapping into.
Briefly think of today’s digital world. Almost everything is increasingly visual. Most popular social media apps? Visual-heavy Instagram and Snapchat. Most popular non social-media apps? Visual-heavy Netflix and YouTube. Most popular way to consume news? Through visuals. Most common ad type you see? A visual ad.
Visuals are everywhere. This gives Adobe a dual tailwind. On one end, Adobe has the Creative Cloud, which allows creative professionals and chief marketing officers to create visuals like pictures, animations and ads for marketing purposes. The importance of this will only grow as the world becomes more visual-centric, and Adobe has essentially no competition in this space.
On the other end, Adobe has the Experience Cloud, which enables customers to turn raw data into personalized campaigns and customer experiences, all with with a visual bend. Again, the importance of this will only grow over time, and Adobe has minimal competition.
In total, Adobe is morphing into the visual cloud king, and that title will become increasingly valuable over the next several years as the world becomes more visual-centric. As such, ADBE stock projects to be a big winner over the next decade.
With respect to the STARS outline, Adobe is building upon, adding complexity to and enhancing the cloud foundation that Amazon and Google established by focusing on the visual cloud, and using big data and analytics to create visual-first solutions.
Numbers: Fortunately, Adobe does most of the math for us already. The company has three major businesses: Creative Cloud, Document Cloud and Experience Cloud. Between the three of them, Adobe pegs its total addressable market at over $80 billion.
How much of that $80 billion can Adobe capture? As noted above, the company dominates the visual cloud and because all three businesses fall under the visual cloud umbrella, it is likely that Adobe taps into a big portion of its TAM. Revenues are expected to hit $9 billion this year. They are growing at a 20%-plus rate. If you assume growth hardly slows over the next decade, which is possible given the huge TAM and lack of viable competition, then Adobe could be looking at ~$50 billion in revenues in a decade.
This is a very profitable business with 40%-plus operating margins. Those margins can easily get to 50% in a decade thanks to price hikes and operating leverage. Thus, Adobe could be looking at $20 billion in net profits in a decade. A normal 20 multiple on that implies a long-term valuation target of $400 billion.
Current Valuation: ~$7B
Long-Term Target: ~$60B
The Short: As the the number of streaming services rises significantly and the internet TV market starts to look more like the linear TV market over the next several years, Roku (NASDAQ:ROKU) is optimally positioned to become the streaming industry’s “cable box” — a position that will command a premium valuation in a decade.
The Long: The world is gradually shifting from linear to internet television. In the early stages of this transition, there were just a handful of streaming services like Netflix, Amazon Video, YouTube and Hulu. But, now that the streaming market is starting to mature, the number of streaming services out there is starting to explode higher.
In other words, as the internet television market matures, it is starting to look more like the linear television market. Linear television has a bunch of channels. Internet television has a bunch of streaming services. In the linear television world, consumers demanded a TV box thst aggregated all those channels, put them in one spot and made it easy for consumers to navigate a linear TV world crowded with multiple channels. Importantly, the maker of that TV box was content-neutral. Disney (NYSE:DIS) didn’t own the networks and provide the content aggregator.
The same thing will happen in the streaming market. As the streaming market matures, more streaming services will come to the forefront. Streaming services will be the new channels. Consumers will want a streaming device that aggregates all those streaming services, puts them in one spot and makes it easy for them to navigate an internet TV world crowded with multiple streaming services. Importantly, the maker of that streaming device will be content-neutral, so that all content is treated fairly on the platform.
Who fits that description perfectly? Roku. The company makes, either on its own or integrated into smart TVs, devices that tap into a streaming ecosystem that enables consumers to watch any streaming service in the world. Importantly, Roku is content neutral. Yes, Roku operates The Roku Channel, which is an ad-supported streaming service. But, it doesn’t have any original content, and because it is free, it doesn’t really compete directly with other paid streaming services.
Also, Roku already has a huge first mover advantage in this market. Long-term, content neutrality and first-mover advantage will propel this company to be the “cable box” of the streaming market.
With respect to the STARS outline, Roku is building upon, adding complexity to and enhancing the streaming foundation that Netflix established by creating an ecosystem that aggregates multiple streaming services, and in so doing, adds necessary structure to the highly fragmented streaming market.
The Numbers: There are three big ways that Roku makes money. One, through the sale of streaming devices, which is a lumpy business with scanty profit margins. Two, through paid streaming subscription revenue shares, which is a steady, annually recurring business with huge profit margins. Three, through the sale of digital ads, which is also a steady business with huge profit margins.
Thus, when you are talking about the long-term growth potential of Roku, you aren’t talking about the hardware business. You are talking about the Platform business, which comprises revenue shares and digital ad sales. The Platform business, because of the hyper-growth potential in the streaming market, projects to be huge.
The linear TV ad market measures $200 billion globally. Over time, almost all of those ad dollars will follow engagement and shift from linear TV to internet TV. As they do, Roku will win a big portion of those dollars if the company can maintain its market-leading position in the streaming device market. Moreover, global internet TV subs are expected to top 450 million by 2022, and likely 600 million or more in a decade.
Let’s assume Roku maintains its market-leading position with at least 30% market share. That would translate into 180 million subs. ARPU should get above Facebook levels because Roku makes money from both digital ads and revenue shares. Facebook’s ARPU globally is $20 and growing. Roku could easily get to $45 or higher in decade. That would equate to $8.1 billion in high-margin Platform dollars. Assuming the Player business scales to about $500 million, you are looking at potential revenues in a decade of $8.6 billion.
Because most of that revenue base is driven by high-margin Platform dollars, I reasonably see $8.6 billion in revenues flowing into $3 billion in net profits. A normal 20 multiple on that implies a long-term valuation target of $60 billion.
Current Valuation: ~$37B
Long-Term Target: ~$100B
The Short: Through enabling digital payments of all sorts across the globe, Square (NYSE:SQ) is morphing into the backbone of modern commerce and becoming indispensably valuable to both buyers and sellers.
The Long: Digital payments are the future. Gone are the days of cash and coins. Now, most commerce transactions are completed with a credit card, debit card, digital payment account or some other form of non-cash payment.
At the core of this transition is Square. The company enables non-cash payments across multiple different channels. Brick-and-mortar retailers can accept card and digital payments in-store simply by owning a Square machine. E-retailers can accept card and digital payments online simply by using Square software. In other words, Square is enabling a whole new world of digital payments.
For each non-cash transaction Square facilitates, whether it be in-store or online, the company takes a cut. Thus, if Square can transform into a mainstream facilitator of non-cash payments globally, the company will be taking a cut from a giant pool of global digital commerce transactions. That implies huge growth going forward for Square.
Moreover, this company is more than just a digital payments enabler. The company has established an ecosystem of services surrounding its core digital payments platform, including Square Cash, Caviar and Square Capital. Between all those digital payment oriented services, Square is constructing a digital payments ecosystem that could potentially morph into the backbone of the global commerce world.
With respect to the STARS outline, Square is building upon, adding complexity to and enhancing the digital commerce foundation that Amazon established by enabling digital and non-cash payments across a spectrum of channels so that buyers and sellers can transact quickly, efficiently and without friction.
The Numbers: Square is attacking a huge market. The company’s addressable market includes the global consumer spend pool. That pool measured $28 trillion in 2010, projects to measure $40 trillion in 2020 and will likely surpass $50 trillion in a decade.
Square doesn’t need to tap a big portion of that market to be immensely valuable. Right now, gross payment volume through Square runs around 0.2% of total global consumer spend. That share has been consistently growing for the past several years. It should continue to grow over the next decade as digital payments grow in popularity.
Thus, in 10 years, it wouldn’t be surprising to see Square’s global commerce share grow to 1%, and gross payment volume total $500 billion. Transaction-based profit normally runs around 1.1% of GPV, so adjusted revenue from transaction-based activities should total about $5.5 billion in a decade.
Including big growth from the company’s ancillary services business, revenues at Square could run north of $8 billion in a decade, versus $1.5 billion projected this year. Such huge revenue growth between now and then should drive equally huge expense leveraging, and the opex rate will likely drop to 30% or lower. All told, I think $8 billion-plus in revenues in a decade can flow into $5 billion in profits. A normal 20 multiple on that implies a long-term valuation target of $100 billion.
As of this writing, Luke Lango was long FB, AMZN, NFLX, GOOG, SHOP, TTD, ADBE, ROKU, SQ and DIS.