Wall Street loves to use acronyms to group together stocks to buy through a common theme. The most famous of these acronyms is FANG, or Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). FANG was coined by Jim Cramer in 2013 to represent the future of the digital economy through the world’s four biggest tech companies.
But, FANG isn’t alone. More recently, the investor community has coined BAT, or Baidu (NASDAQ:BIDU), Alibaba (NYSE:BABA) and Tencent (OTCMKTS:TCEHY), to represent the three big Chinese tech stocks. They’ve also coined MAGA — Microsoft (NASDAQ:MSFT), Amazon, Alphabet and Apple (NASDAQ:AAPL) — as the new FANG, or MVP — Mastercard (NYSE:MA), Visa (NYSE:V) and PayPal (NASDAQ:PYPL) — as the way to play the digital payments revolution.
While all of these acronyms are good, none of them are the best. That title belongs to STARS. STARS is a little known acronym which was coined on InvestorPlace in 2018 to represent the next generation of breakout FANG stocks. Broadly speaking, STARS is the class of market-leading internet service stocks that build upon, add complexity to and enhance the internet economic foundation that FANG established. In so doing, they are unlocking tremendous value by dramatically improving consumer and enterprise outcomes in the digital economy.
For what its worth, over the past three years, each STARS stock is up more than 75%. Indeed, the average gain in the group during that stretch is 160%, versus a mere 13% gain for the S&P 500.
Who are the STARS stocks? Let’s take a deeper look.
The first ‘S’ in STARS stands for Shopify (NYSE:SHOP).
In a nutshell, Shopify provides omnichannel commerce solutions to retailers of all shapes and sizes, and in so doing, it is pioneering a new era of decentralized commerce. This market is currently nascent, but rapidly growing, and it has the potential to be very large one day. As such, so long as Shopify remains the market leader and consumer trends continue to push for decentralization, SHOP stock will be a big winner.
The idea here is pretty simple. Traditionally speaking, supply in the retail market has been provided by only a few. But, thanks to the coordinated economy, this supply is now being democratized. Namely, Shopify is providing solutions at affordable price points so that anyone can sell anything online. The result? Supply in the retail market is becoming increasingly large and diverse. Shopify is coordinating all that supply to satisfy demand-side expectations. Thus, supply is catching up to demand, and consequently, prices are falling and consumer convenience is rising.
In other words, Shopify is turning into a quintessential coordinator in the digital retail economy. This position will ultimately translate into robust growth over the next several years. Indeed, we are already seeing this play out. Shopify is consistently growing top-line metrics north of 50% year-over-year, and that growth rate isn’t showing any alarming signs of slowing. Margins are moving higher. Profits are ramping. SHOP stock is trending in the right direction.
And it’s all because of Shopify’s ability to coordinate the increasingly large and diverse supply in the digital retail economy to improve buyer and seller outcomes. So long as this remains true, SHOP stock will remain a big long-term winner.
The Trade Desk (TTD)
The ‘T” in STARS stands for The Trade Desk (NASDAQ:TTD).
The Trade Desk provides programmatic advertising solutions to companies of all shapes and sizes that are looking to optimize their ad spend. In plain English, this means that The Trade Desk utilizes AI, analytics, and algorithms to automate the process of buying and selling ads. Over the past several years, programmatic advertising has started to gain traction, and Trade Desk has distinguished itself as the runaway leader. Consequently, TTD stock is up nearly seven-fold over the past two years.
But, for all intents and purposes, this growth narrative is still in its early innings. The Trade Desk is guiding for gross ad spend through its platform to measure just over $3 billion this year. The global digital advertising market measured just over $230 billion last year. Thus, TTD is penetrating just over 1% of its addressable market today. Further, that addressable market is expected to grow, and programmatic advertising is expected to be used not just in the digital ad world, but throughout the whole ad world at scale. That total ad market globally is marching toward $1 trillion, implying less than 0.5% penetration for Trade Desk.
In other words, TTD’s big growth narrative is just getting started. Valuation is pretty fully in anticipation of big growth for a lot longer. But, it’s not too full. Over the next several years, robust gross ad spend and revenue growth will couple with healthy expense leveraging to push profits materially higher. If that happens, TTD stock will rally in a big way, too.
The ‘A’ in STARS stands for Adobe (NASDAQ:ADBE).
Adobe provides creative-oriented solutions with a broad spectrum of applications for creative amateurs, creative professionals and enterprises. These solutions can be packaged into three clouds: the Document Cloud, the Creative Cloud and the Experience Cloud. All three of these cloud businesses are big growth, high margin, steady revenue businesses attacking large markets. As such, these three cloud businesses will power a bright tomorrow for ADBE stock.
Document Cloud is the package of solutions Adobe provides to enterprises and individuals which enable them to create, edit and amplify digital documents. This includes things like PDF editors, online signatures, so on and so forth. This market is large ($7.5 billion), the trends are positive (everyone is going all digital) and Adobe has a clear advantage in capitalizing on those positive trends (Adobe is the brand name in PDF).
Meanwhile, Creative Cloud is the package of solutions Adobe provides to enterprises and individuals which allow them to create, edit and amplify visual-oriented pictures, videos, projects, presentations, etc. The market here is large ($30 billion), the trends are positive (we are increasingly immersed in a visually dominated world) and Adobe has a clear advantage (Adobe is the unparalleled leader in photo and video editing software).
Last, but not least, is the Experience Cloud, which is the package of solutions Adobe provides mostly to enterprises which allow them to improve the entire customer experience. The market here is very large ($70 billion), the trends are likewise positive (we are shifting to an experience-driven economy), and Adobe has a clear advantage (Adobe is king when it comes to delivering on the visual aspect of the consumer experience, which is increasingly important).
Overall, Adobe is powered by three secular growth cloud business, all three of which have huge long-term potential and none of which project to slowdown anytime soon. As such, ADBE stock, which is up 300% over the past five years, will stay on a winning trajectory.
The ‘R’ in STARS stands for Roku (NASDAQ:ROKU).
Roku provides aggregation and curation services in the streaming world through its Roku ecosystem, which is available through both Roku players and within some smart TVs. The long-term bull thesis here is that, as the streaming world becomes increasingly large and diverse, the need for aggregation and curation services will burgeon. Roku is already the leader in doing this, and if they remain so at scale, then Roku could transform into the cable box of the streaming world. That position will ultimately command a huge valuation at scale.
To be sure, there are risks to this bull thesis. First and foremost, you have the no moat risk. Bears will argue that Roku’s product is easy to replicate, and that protection against such replication is very small. Second, there’s already a ton of competition. Roku is competing with the likes of Amazon, Apple and Alphabet in this space. Third, streaming access at scale will likely be exclusively through smart TVs, and traditional Roku players may become extinct.
Yet, all three of those risks have easy answers. The moat for Roku is its user base, which now numbers nearly 30 million active accounts and is unparalleled in the streaming device world. Competition has been around a while, and it hasn’t knocked Roku off course. Instead, the company has now reported six consecutive quarters of 60%-plus streaming hours growth and 40%-plus active account growth. And, Roku owns the smart TV world, with 25% and growing market share.
Thus, in the big picture, it is becoming increasingly obvious that Roku is leveraging its easy-to-use interface and first mover’s advantage in this market to only get bigger, despite rising competition and other operational risks. This trend will persist over the next several years. As it does, Roku’s account base will grow. Streaming hours will go up. Revenues will rise. Margins will expand. Profits will soar.
And, Roku will turn into the cable box of the streaming world, which will translate into big gains for ROKU stock.
The last ‘S’ in STARS stands for Square (NYSE:SQ).
Square is a payments processor. The long-term bull thesis on SQ stock is simple. Cash is becoming a thing of the past. As it does, alternative payments are rising in volume. Square is developing various solutions to process those alternative payments in a relatively frictionless manner. Importantly, they are doing so in an innovative way, which is allowing them to create an ecosystem around its various products. Over time, this ecosystem will become increasingly large and valuable. Revenues and profits will rise. SQ stock will rise, too.
The first leg of this bull thesis is already largely complete. Square started out as a payments processor which made it easier for brick-and-mortar merchants to accept card payments. This has powered huge growth throughout the Square ecosystem over the past several years as consumers have increasingly shifted toward card payments. This transition is far from over. As card payment volume continues to surge, Square adoption will spread and total payment volume will rise.
But, this is just the first leg of Square’s long-term growth narrative. Over the past several months, Square has expanded its ecosystem to include various payment-adjacent markets. This includes mobile money transfer platform Cash App, which is already more heavily downloaded than Venmo. It also includes a new business debit card, in-app payment software and expansion of Square Payroll.
All together, Square is a payments processor. But, it’s also morphing into much more. Namely, Square is becoming a mini-bank. As such, the combination of tailwinds in payments and banking will continue to power robust results at Square. Those robust results will keep SQ stock on a winning path.
As of this writing, Luke Lango was long FB, AMZN, NFLX, GOOG, BIDU, AAPL, PYPL, SHOP, TTD, ADBE, ROKU and SQ.