[Editor’s note: This story was previously published in April 2019. It has since been updated and republished.]
Amazon (NASDAQ:AMZN) has been one of the most impressive stocks in history. Amazon now has returned over 165,000% from its initial public offering (IPO) price of $18 (adjusted for subsequent stock splits). Put another way, $1,000 invested in the IPO, with no sales over the intervening 23 years, would be worth $1.65 million today. Clearly, finding the next Amazon will be no easy feat.
The company’s returns have come from two key factors. First, as a business, Amazon has vastly expanded its reach. What originally was just an online bookseller now has its hands in everything from cloud computing to online media to groceries. The company only recently dipped its toe into advertising, but quickly is joining Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) as an online advertising giant.
Second, as a stock, Amazon has managed the feat of keeping a growth valuation for over two decades. I’ve long argued that investors can’t focus solely on the company’s high price-to-earnings (P/E) ratio to value Amazon stock. The market as a whole isn’t keeping that short-sighted focus. The company has been assigned a substantial premium for over 20 years now. There’s no sign of that ending any time soon.
It’s an impressive combination. It’s one that’s likely impossible to duplicate in full. But these five stocks have the potential to replicate at least parts of the Amazon formula and could become “the next Amazon:”
Stocks That Could Be the Next Amazon: Square (SQ)
Thanks to a snapback rally from March lows, Square stock is back to being dearly expensive. Shares trade at almost 100x next year’s consensus earnings-per-share estimate.
Of course, valuation worries have done little to dent the steady rise in AMZN stock. And there’s a clear case for Square to follow an Amazon-like expansion of its business. Instinet analyst Dan Dolev once compared Square to Amazon and Alphabet, citing its ability to expand from its current payment-processing base: “In 10 years, Square is likely to be a very different company helped by accelerating share gains from payment peers and relentless disruption of services like payroll and human resources.”
After all, Amazon used books to expand into a broader e-commerce offering. From there, music, video, the cloud and more followed. Square can execute a similar strategy with its payment business.
The small business space is ripe for disruption, as our own Josh Enomoto has pointed out. Integrating payments into payroll, HR and other offerings would dramatically expand Square’s addressable market — and lead to a potential decade or more of exceptional growth. Square continues to lead the way in cryptocurrency as well.
The valuation for SQ stock might appear to be a concern. But if, like AMZN, SQ stock can combine a high multiple with consistent, impressive expansion, it has the path to create substantial value for shareholders over the next five to 10 years.
Like Amazon (and unlike Alibaba), JD.com holds inventory and is investing in a cutting-edge supply chain. It, too, is expanding into brick-and-mortar grocery. A partnership with Walmart (NYSE:WMT) should further help its off-line ambitions. A more recent deal with Cloudflare (NYSE:NET) backs its cloud and artificial intelligence ambitions.
In terms of e-commerce market share, JD.com still is a distant second to Alibaba. And third-place Pinduoduo (NASDAQ:PDD) is closing fast. But JD.com can win in newer markets even if it doesn’t track down Alibaba in e-commerce.
Here, too, valuation is a bit of a concern, as JD stock has gained 68% so far this year. But none of the stocks on this list are going to be cheap. None should be. Given massive opportunities in e-commerce and beyond, JD stock at 30x forward earnings hardly seems out of line.
The bull case for e-commerce provider Shopify is precisely that it is the next Amazon — with a twist.
Shopify, after all, isn’t going to sell directly to consumers, as Amazon does. Rather, it’s going to help businesses do so. Indeed, at this point, basically every company that isn’t Amazon is a potential Shopify customer.
This is not just a small business play, as it was to begin with. Shopify Plus targets bigger customers, including Ford (NYSE:F) and Anheuser-Busch (NYSE:BUD). It goes toe-to-toe with Magento, acquired by Adobe (NASDAQ:ADBE) back in 2018.
And SHOP stock isn’t just an e-commerce platform play anymore, either. The launch of the Shopify Fulfillment Network is a shot across the bow at Amazon itself. Like Square, Shopify can launch new features for sellers, creating what is truly a “one-stop shop” for any company looking to sell online.
International expansion adds another potential driver. Less than one-third of 2019 revenue came from outside the United States.
Over its 26-year history, Amazon has steadily acquired more and more consumer spend, thanks to both a growing online market and expanding reach. Shopify’s long-term path is to do precisely the same on the business side. At 45x revenue, SHOP stock is pricing in a good deal of that potential. But as Amazon itself shows, valuation is not a reason to sell a business with such a massive opportunity.
Amazon got its start selling books online, which is not a great business. Roku drove its early growth by selling hardware for streaming video, which, isn’t great business either.
It might not seem that way. Roku has out-executed rivals, including Amazon to gain top market share. But that’s in part because Roku doesn’t actually make any money from its player business. In fact, it sells its devices at a loss.
Over the past four quarters, player gross profit has totaled barely $20 million. Research and development spending alone, over the same stretch, is nearly $300 million.
But Roku plans to make an awful lot of money elsewhere. Advertising revenue continues to grow. New streaming launches from Disney (NYSE:DIS), AT&T (NYSE:T) and Comcast (NASDAQ:CMCSA) will only add to demand. The Roku Channel increasingly is becoming a front door to the streaming ecosystem, and provides another source of profit going forward.
And that’s probably just the start. The combination of streaming growth and Roku’s base of nearly 40 million accounts gives the company potential options. No one knew in 2004 that Amazon would become the world’s leading cloud provider. Come 2025, Roku likely will have a business that investors haven’t yet considered — or priced into ROKU stock.
Like Amazon, Chegg got its start with books. In Chegg’s case, it was a rental service for hard-copy college textbooks.
That wasn’t a very good business — at all. But, as with Roku, the original business was just a loss leader used to build out a huge base of customers. In 2015, Chegg then outsourced that business, instead focusing on its online ecosystem for college students.
It has been a hugely successful strategy. CHGG stock has gained 643% over the past five years. Revenue growth has been impressive as Chegg keeps adding new services. Profitability is impressive too: adjusted net margins in 2019 were nearly 30%. A blowout first quarter report shows that Chegg continues to run on all cylinders.
There should be plenty of growth ahead. The upheaval caused by the novel coronavirus pandemic may well shake up higher education in the U.S. and elsewhere. Chegg’s massive user base and huge head start on its competition suggest the company could capitalize.
Luke Lango, who has been on top of the bull case for years now, argued last month that CHGG stock could get to $200 from a current $58. International growth, an accelerating shift to digital learning and skill course offering Thinkful can all drive years more of growth. Chegg may have started renting textbooks, but it may finish as one of the leaders in education worldwide.
Vince Martin has covered the financial industry for InvestorPlace.com and other outlets for close to a decade. He has no positions in any securities mentioned.