If you’re reading this, it’s likely because you want to find the next Amazon, the next Apple, or the next Tesla. But uncovering these new companies takes more than adding a few push notifications from CNBC, Wall Street Journal, and the other big wigs of financial mainstream media.
It takes the resolve to commit to hundreds of hours of research… the work ethic to put one foot after the other to see, first-hand, what it is you’re investing in… and the seasoned eye of someone who’s “been there, done that” to separate the genius ideas from the crazy ideas.
Well, we have done the legwork – the hours of research, the boots-on-the-ground perspective, the vision… all unpacked and distilled into a report designed to guide you toward becoming a smarter investor in 2023.
By reading this report, you’ll get a little closer to understand the minds of the entrepreneurs behind “the next Amazon.”
I want you to see the gears turning in an entrepreneur’s head and be able to follow the vision of how they go from hometown garage to Wall Street giant.
How on Earth was Jeff Bezos able to make Amazon into the trillion-dollar company it is today?
How did Steve Jobs leapfrog the entire computer industry and fend off other, much larger, and well-funded companies to make AAPL one of the world’s most valuable companies?
I’ll tell you what they didn’t do… they didn’t begin with the perfect idea of their product or company. They didn’t capture lightning in a bottle…
Every single great company that you can name began with a problem.
Entrepreneurs who take a leap of faith, leaping from a comfortable living and into the unknown, do so by first identifying a problem they want to solve.
These problems plague their minds, driving them to create solutions that the market has not dreamt of yet.
For Jeff Bezos, his “a-ha!” moment happened in 1994, when he learned the world wide web had grown 2,300% in a single year.
As a numbers guy and former senior vice president of the D.E. Shaw hedge fund, Bezos couldn’t ignore the opportunity in front of him.
Bezos made a list of all the various items he could sell online. He settled on books.
After all, people were still going to Barnes & Noble to buy their books… but the internet’s massive growth and the scalability it affords (Bezos would only need to make one “store” that could sell to the world), presented Bezos with both the ideal megatrend in which to build his company and the ideal problem that it would solve.
Thus, Amazon.com was born.
And it’s thrived, growing into the world’s most valuable publicly traded company because it continues to build products that solve problems.
Today, AMZN’s near-$2 trillion valuation hinges largely on its Amazon Web Services (AWS) platform. But its inception was not the product of a brilliant idea…
Instead, Amazon’s strongest engine of growth today came about because of a recurring problem the company needed to solve.
Let’s rewind many, many years ago, during Amazon’s struggles to scale its e-commerce efforts.
Back then, it took far too long for the company to implement its own internal software projects.
What Andy Jassy, Bezos’ so-called “shadow advisor” at the time, uncovered was that the company’s teams were unable to scale their own projects at a company level.
This created severe inefficiencies affecting Amazon’s ability to coordinate and incorporate projects between teams.
A lesser company could have solved its own problem and went on its merry way. The entrepreneurial gears began turning in Jassy’s head, however, and he realized that other companies must be dealing with the same problem.
Jassy’s fix to Amazon’s problem was a solution that could be used repeatedly by its many engineering teams across many projects, thus allowing Amazon to function at an even faster pace than ever before.
It worked so well, in fact, that Amazon turned its solution into a business all its own, selling cloud computing as a service to other companies dealing with similar problems.
That solution? Amazon Web Services.
Today, AWS generates more than $12 billion in net sales per quarter and continues to experience double-digit growth. It’s so important to Amazon’s future, in fact, that Jeff Bezos recently appointed Andy Jassy the new CEO of Amazon.
Let’s turn to another dynamic duo in tech – Steve Jobs and Steve Wozniak.
Jobs and Wozniak didn’t create Apple with the hope of simply cashing in on personal computers.
At the time, there was NO market for personal computers when the duo set about to build the Apple I.
They created the market.
Both Jobs and Wozniak invented the Apple I for one simple reason — they wanted a personal computer they could use.
Well, Wozniak more than Jobs, as Jobs definitely saw the potential to create a revolutionary product.
But that’s beside the point: Both of them built the Apple I because they wanted a computer and the options at the time were impractical for personal use.
In the mid-1960s, roughly half of all the world’s computers were IBM 1401s, which replaced bulky vacuum tubes with transistors. The 1401 was considered the Model T of computers because it sold well (for the time), producing 12,000 units and making the case for the computer as a general-purpose (as opposed to hobbyist) machine.
However, the 1401 weighed about five tons all-in. It’s not exactly something Jobs and Woz could lug around to their friends’ houses.
The first consumer PC, however, was not the Apple I. That honor goes to the Altair 8800, a DIY computer popular among hobbyists. In fact, it was the Altair from which Jobs and Woz drew inspiration for the Apple I.
That desire to build a computer for themselves led to the Apple II, the first true PC designed for consumers.
Rather than weighing a literal ton or being packaged as a single board meant to be installed by folks with the know-how, the Apple II resembled an ordinary home appliance.
Right out of the box, ordinary folks without strong technical knowledge, could be up and running in relatively little time.
It was the world’s first truly customer-friendly, pre-assembled computer for the masses, and it set the stage for the computer industry to this day.
Apple is a great example of problem-solving on a large scale… but it’s also illustrative of another very key characteristic we look for…
Here’s Steve Wozniak reflecting on his time at Apple:
“Every single Apple project – computers, hard disks, everything – I had never designed those things ever in my life… I had no training in them, but I was so good at taking the little parts – like pieces of wood to build a building – that I could architect something that was perfect. And really better than the people that were used to doing it would do.”
Woz isn’t bragging here. He’s making an important point…
While education and training are important, nothing is a substitute for unbridled creativity and innovation.
Here’s Woz again:
“A person who knows how to take the little elements and build on them, and write the book of how you actually put them into play, a person who comes up with the ability to write the book, I think is better than someone who knows how to do it from past experience.”
That’s exactly who we are… we are the people with the ability to write the books on how to invest in small companies, like Apple in the ‘70s.
That’s exactly what I know how to do, and I intend for you to find companies with Apple-like potential.
But Aren’t Small-Cap Stocks Risky?
In a word, yes. Small-cap stocks are very risky indeed.
Many people mistakenly latch onto emerging companies, believing whole-heartedly that they will become The Next Big Thing.
Even former President Barrack Obama is guilty of this.
In 2009, a company called Solyndra caught the eye of Obama, who effectively became the company’s personal brand ambassador.
Solyndra’s circular solar panels were innovative enough and efficient enough that the former president believed it would create hundreds of new jobs.
What’s more, it had the backing of the VC world, with billions of dollars in funding coming directly from venture capitalists and hedge funds.
But Solyndra came apart when it became clear that the company didn’t actually have a business plan. And rising costs and a lack of customers sent the company into bankruptcy by 2011.
So, you see, it can happen to anyone.
Anyone can make a bad bet. Anyone can sign their name on the dotted line of a sinking business…
It’s just like life: You can’t cheat the grim reaper… but you can take steps to mitigate your risk.
One of the most important steps to take is to educate yourself to warning signs of emerging companies on the brink of failure.
By doing so, you will be able to tell the winners apart from the losers.
And you can save yourself from catastrophic losses.
One of the common mistakes emerging companies and entrepreneurs make isn’t in their execution… it’s not even in the products themselves. In fact, a company may have an extremely well-made, highly marketed product… that fails.
Why does this happen?
Dollars to donuts, this usually happens when the fundamental reason for their product, service, or company existing is flawed.
That is, they are attempting to solve problems that do not exist.
We have seen this time and time again.
And it can happen to both small- and large-cap companies.
Unfortunately, when it happens at the small-cap level, it can also take down thousands of well-meaning investors.
I’m talking about folks who put everything they have into these companies because they were thinking too much about the hype and not at all about the problem the company is solving.
This is why, we’d never recommend that anyone put more than 3% behind any one company, but we’ll talk more about that later.
Right now, I want you to focus on this single red flag – products that do not solve anything.
No? There’s a reason for that.
Netflix (NFLX) has dominated streaming media and the entertainment business in general. And up until September 2011, NFLX had already gained 2,000%-plus…
But it found itself — seemingly — at a crossroads… it’s DVD-by-mail service had been huge, but its streaming service was the secret sauce investors were interested in.
Much like Blockbuster had been unwilling to let go of its ancillary business of renting physical products, Netflix could not let go of its own physical product service.
It took its golden goose – streaming – and stuffed it inside of an awkward attempt at rebranding streaming and a baffling attempt at segmenting the company.
It was called “Qwikster.” It existed for just a month.
The idea for this new service was intended to create more convenience… for users who didn’t need more convenience. At least, not in the way provided by Qwikster.
At the time, Netflix had 12 million customers with both DVD and streaming accounts. Qwikster would have forced them to create two separate accounts. One for their DVDs. One for streaming.
Instead of solving an existing problem, it created more problems.
Which is why Qwikster died a quick death, with Netflix all but pulling the plug on it a month later.
As far as bad ideas go, it’s right up there with New Coke.
You know what’s worse than plowing your hard-earned money into a business that goes belly up? Putting it into a scam.
Have you ever seen Boiler Room?
It’s essentially about a brokerage firm that pushes terrible “penny stocks” on unsuspecting clients.
They preyed on their clients’ greed in order to get them to buy in to “pink sheet” companies that sounded good on paper. But these companies were absolute dogs.
The firm used its own brokers to pump up shares – a task easily accomplished with small companies – and then immediately dumped their stock for record profits.
It may be a movie, but it’s ripped from the pages of reality.
When it comes to small caps, or micro caps, or penny stocks, you are navigating an ocean of volatility and risk.
It’s why the U.S. Securities and Exchange Commission publishes resources to educate potential penny stock investors on the risks involved.
One such resource reads:
“While all investments involve risk, microcap stocks are among the most risky. Many microcap companies are new and have no proven track record. Some of these companies have no assets, operations, or revenues. Others have products and services that are still in development or have yet to be tested in the market. Another risk that pertains to microcap stocks involves the low volumes of trades, which may make it difficult for you to sell your shares when you want to do so. Because many microcap stocks trade in low volumes, any size trade can have a large percentage impact on the price of the stock. Microcap stocks may also be susceptible to fraud and manipulation.”
Indeed, when it comes to small companies, investors must be prepared for the possibility of total loss, or more if they invest using margin.
That begs the question: Why invest in small businesses at all?
So Why Take the Risk on Small-Cap Stocks?
I’ll tell you in just a word – “asymmetry.”
Have a seat at a bar with any of the world’s top investors, and you’re likely to hear this word uttered at least once.
The world’s smartest and greatest investors are all obsessed with asymmetry.
It’s the exact opposite of what most people crave, which is symmetry.
Most people look for symmetry in their love life. They want an even keel in their relationship. They also find it attractive as, traditionally, beautiful people tend to have symmetrical features.
But financial experts are not “most people.”
Most people are not able to 10X, 50X, or 100X their investment.
When it comes to small-cap stocks, all you need to know is that symmetry is for chumps.
Asymmetrical bets are exactly what make small-cap stocks worth the risk.
If you risk $1,000 for the chance of making $100,000, you make an asymmetrical bet.
But risking $1,000 for the chance of making $1,000, means you are — like most people — making symmetrical bets.
Investors often make the mistake of “betting the house,” so to speak, on returns that equal that house. In other words, they put up 100% of their money for 100% returns.
Symmetry. It’s a financial killer.
But that’s not exactly common knowledge. Most people, again, would be more than happy to risk a dollar to make a dollar.
And that’s a part of why small-cap stocks are so risky.
For the average investor chasing a dollar with a dollar, it’s difficult to discern the stocks that have upside from the stocks with exponential upside.
But that’s exactly where I excel. As a mathematics major, I look to the numbers to guide me. I don’t like casino odds, which is exactly what you get with symmetrical bets.
Most people don’t understand why those odds are so bad. They don’t know why the world’s best investors aren’t standing shoulder to shoulder with them in a position.
They confuse it for their own savviness. They tell themselves that they’ve found the trade Wall Street has not found.
Meanwhile, the best traders and investors are hunting opportunities where every dollar they risk could yield $5, $10, or even $20.
And there’s no better place to put the power of asymmetric bets to work than in small-cap stocks, the best of which have massive upside potential.
The Engine That Drives the American Economy
Yes, starting a small business is hard. Running a small business is even harder. And investing in a small business can be the most difficult decision in your life.
We take that very seriously. But I personally believe that small business is the single most important piece in the entire U.S. economy.
Starting a small company is the American dream.
A lot of people refer to small businesses as “mom and pop” shops. But due to the law of accelerating returns, there are more entrepreneurs with deeper access to high-technology than ever before.
As a result, today’s “mom and pops” actually are more like “brother and sister” shops – because their founders are very young, usually under 35.
People in their 40s and above did not grow up in sync with the innovations of today and the possibilities of tomorrow. They have to learn these new paradigms.
People in their 20s and early 30s, however, did grow up in today’s high-tech paradigms.
They don’t have to learn it – they just need to harness it to solve a problem that, very likely, they’ve experienced themselves.
The youth have a built-in advantage.
But despite how well-positioned “brother & sister” shops are at taking full advantage of today’s paradigms, the idea of disrupting the status quo is inherently risky.
There will be ups and downs. But we stomach that risk when we believe in the entrepreneurial spirit behind the company and its ability to affect change rapidly.
Which is why many people are hesitant to bet on the underdog.
That hesitancy is a product of how most people think about symmetry.
If you’re risking 100% of your money for 100% return, then you’re more likely to focus on the possibility of losing 100% of your money than you are doubling it.
Those who think in these terms are unable to make the asymmetrical bets offered by the young and the brilliant.
These people lack the capacity to see what it is that drives the entrepreneurial spirit that shifts paradigms and moves mountains… they’re scared by those who move fast and break things.
Let’s go back to Jeff Bezos, who started Amazon.com when he was 34.
He began his company at home, in his garage, and he held meetings at the local Barnes & Noble of all places.
While Amazon may be a trillion-dollar company today, the American dream did not come any easier for Jeff Bezos.
Bezos’ early Amazon.com attempts were very costly to both his home life and to those of his employees.
In Amazon’s early days, the servers he housed in his garage were burning so much electricity that he and his wife couldn’t even run their vacuum for fear of blowing the home’s fuse box.
For his employees, Bezos demanded a sacrifice: If you worked at his startup, you would not have a work-life balance.
Early employees reported sleeping in their cars because they worked the graveyard shifts and needed to arrive early the next day.
During Amazon’s first-ever holiday crunch, the company found itself totally outmatched to meet the unexpected demand. Being the perpetual problem solver that he is, Bezos took his lumps and learned a valuable lesson.
Today, Amazon continues to push for a surge in seasonal worker hiring for the holidays.
So what am I getting at here?
To be a successful small company takes incredible energy from leadership… it takes the kind of energy typically found in our youth.
To be a successful small company takes a lifelong commitment to solving problems. Only those who intimately know the megatrend and experienced the problems that need solving can make efficient, unblinking decisions.
This is why I love small business. It’s the absolute best place to find scrappy, young entrepreneurs with paradigm-shifting ideas and the grit to push that idea forward no matter the problem in front of them.
And as an investor, I’ve done my homework on the best place in the world to find small companies with big ideas.
Think of the most consistently successful place in America when it comes to small business.
What are you thinking of?
Are you picturing some town in Idaho, lined with row after row of mom & pop shops?
Or are you picturing the single most successful, innovative, hyperfocused region in the world for small business — Silicon Valley?
Silicon Valley produced Apple.
I could go on and on.
This level of “unicorn production” isn’t by accident. It’s by design.
Innovation, problem-solving, unwavering vision… these are characteristics that are encoded in Silicon Valley’s DNA.
It’s a place where myriad cultural currents have ran together to create an oasis of innovation since the ‘60s.
Military contractors, game designers, microchip builders, electronics makers, and more, all contributed…
Sub-cultures of hackers, activists, hobbyists, and geeks all contributed…
Academics, hippies, musicians, artists, self-fulfillment groups, and more, all contributed…
It’s a nexus of innovation. All of these various groups and their heady ideas created an uber innovative region that produced (and continues to produce) innovator after innovator…
I know some of you may be thinking, “Do you seriously believe you can find ALL of the next Amazons, or Apples, or Facebooks?”
I can answer that with one word – No.
No, we don’t think we can find all of them. But that’s just the thing…
You don’t have to find all of the innovators and potential unicorns… you just need to find one.
So, Let’s take a deeper look through the lens of big ideas at five of my favorite hypergrowth stocks to buy for 2023 and beyond:
Hypergrowth Stocks for 2023 #1: Rivian (RIVN)
It may be hard to believe. But back in May 2019, a ton of Wall Street analysts were calling Tesla (TSLA) stock dead money.
Fast forward 3 1/2 years. Tesla stock has soared 1,500%, turning every $10,000 investment into a $150,000 payday. Over that same stretch, the S&P 500 is up just 37%.
A lot of folks have since asked me: Luke, how did you see so early on that Tesla stock would be a winner?
There are several reasons. But perhaps the funniest – and most unique – is that I simply kept an ear to the ground.
I watched the world around me change rapidly. In 2019, I started to notice a plethora of Tesla Model 3 vehicles. Folks were driving them through suburban San Diego neighborhoods. I saw them parked in front of shopping malls, grocery stores, and gyms. All my friends were talking about Tesla cars. Many were considering buying one.
The buzz was all about Tesla. I knew, eventually, that buzz would feed into the income statement, power huge delivery and revenue growth, and lead to an enormous run in the stock price.
Indeed, that’s exactly what happened.
Now, believe it or not, I’m seeing history repeat.
This same dynamic is happening all over again. But not with Tesla cars – with Rivian (RIVN) vehicles.
Now, let me be clear on where I stand on Rivian stock. I’m bullish, and that’s before my ear to the ground told me to be.
For those unaware, Rivian is an EV startup that’s designing, manufacturing, and selling high-end electric SUVs and pick-up trucks. The company is widely considered one of the most technologically advanced and promising pure EV makers in the world today.
Rivian just started delivering units of its first model – the R1T – in 2021.
It’s an electric pick-up truck that seats five, has a 54×50-inch bed and gets roughly 300 miles per charge. It can tow up to 11,000 pounds and has a 0-to-60 mph time as quick as three seconds. The interior is comprised of vegan leather, with a panoramic all-glass roof and a custom enhanced audio system.
It’s a very high-quality electric pick-up truck. It currently starts at $73,000. Rivian delivered almost 1,000 of these trucks in 2021 and is on track to deliver more than 20,000 this year.
Rivian’s second model is an electric SUV dubbed the R1S.
Rivian’s second model is an electric SUV dubbed the R1S. It’s a large-format SUV that can comfortably seat up to seven passengers and their gear. It, too, gets roughly 300 miles of driving range on a single charge and can accelerate from 0-to-60 mph as quick as three seconds. It has all-wheel-drive capability and is outfitted with the same interior fittings as the R1T: vegan leather interior, all-glass panoramic roof, and a custom enhanced sound system.
R1S deliveries have just barely begun, but we are starting to see a few out in the wild. Significant ramp is expected in the coming months. Starting price is $78,000.
Rivian went public in a highly-anticipated and briefly super-successful initial public offering (IPO) last year. The stock has since struggled after a brief hot run. Today, the company is worth $32 billion – and that’s a valuation that I think is an absolute steal for this stock.
Long-term, I strongly believe that high-quality EV stocks are great multi-year investments. Indeed, EVs are set to grow from ~10% of car sales today, to 50%-plus by 2030. As the whole industry grows 5X, the companies at the forefront of this disruption will sell a lot of cars. They’ll generate lots of profits and unlock lots of shareholder value.
Over the next five to 10 years, some of the stock market’s biggest winners will be high-quality EV stocks.
In that realm, Rivian stock is one of my favorites.
Why? There are, in my opinion, five big sticking points of the bull thesis:
- Leader in a strong demand niche of the burgeoning EV industry. We know that the trucking niche of the automotive market is very large with very durable and strong demand drivers. Presumably, as that portion of the auto market gets electrified, there will emerge an equally large electric truck market. Presently, there is no clear leader in that market. But Rivian has a promising early start with a fantastic first-to-market truck that has among the best specs in the industry. This electric trucking market will support multiple winners, and we’re confident Rivian will be one of them.
- Great brand equity, with strong technology and a fantastic first product. Rivian has established exceptional luxury branding and has developed leading EV battery and torque technology. These are two things that are very important for creating a great electric truck. Indeed, the R1T is probably the highest-performing electric pick-up truck in market today. And it should remain so for the foreseeable future.
- Strong early demand signals. Rivian has more than 90,000 net preorders in the U.S. and Canada for the R1S and R1T, illustrating that consumers want these cars.
- Big support and partnerships. Aside from its recently-announced collaboration with Mercedes-Benz, Rivian also has a very unique and promising partnership with Amazon (AMZN). The retail giant will buy at least 100,000 electric delivery vehicles from Rivian. The extent of this partnership broadly implies that Amazon has basically picked Rivian as its “horse” in the EV race. And at scale, it will convert its entire delivery fleet into Rivian cars. That represents a huge long-term opportunity.
- A mammoth-sized balance sheet. The best thing about Rivian is that it has almost $20 billion in cash on the balance sheet. And that grants the company an almost unfair advantage over peers. Rivian plans to use basically every penny of that cash balance over the next two to three years to develop market-leading tech, secure market-leading supply deals, and establish market-leading production capacity. Rivian’s $20 billion should enable it to create an electric vehicle empire by 2025.
For those five reasons, I believe Rivian projects as one of the largest producers of EV cars by 2030, rendering it one of the most valuable auto companies in the world by then.
My “back-of-the-napkin” math indicates that Rivian could hit the million-deliveries-per-year milestone by the late 2020s. At a $70,000 average sales price, that implies total revenues of $70 billion. Assuming a similar margin profile as Tesla (30% gross margins/20% operating margins), that would lead to $14 billion in operating profits – or about $10 billion in net profits after taxes.
A simple 20X price-to-earnings multiple on that implies a potential late 2020s valuation target for Rivian of $200 BILLION. That’s nearly 10X the current market cap, meaning I see Rivian stock as a potential ten-bagger.
OK… now that we’ve run through the long-term bull thesis, let me tell you why I’m so excited about Rivian stock right now.
To me, it feels like Rivian in 2022 is going through what Tesla did in 2019.
You can call it a “moment” or an “awakening.” Call it what you want, but what’s happening is that – like Tesla in 2019 – Rivian is rapidly ramping production of its vehicles in 2022. Those vehicles are appearing all over, and everyone in the prospective car buyer world is talking about the R1T and R1S.
Here in San Diego, the Rivian was an ultra-rare sighting just two months ago. But this past weekend alone, I saw four driving on surface streets, three on the highway, and three parked in the same parking lot for a Spirit Halloween store. (We’re big Halloween fans at the Lango household).
And over the past two weeks, I’ve been receiving text messages from friends that all read something like: “Just saw another Rivian! They look so cool!”
In conversation, no one is talking about buying a Tesla Model 3, X, Y, or S anymore. They’re all talking about Rivian.
Of course, anecdotes are not evidence. But a series of nearly identical anecdotes three years ago did correctly predict the boom in TSLA stock, so I wouldn’t discount them entirely.
They also line up with the data that Rivian just reported. The company produced 7,400 vehicles last quarter, up 67% from the previous quarter!
Based on everything we’re seeing, it seems clear to us that Rivian is gaining significant traction in the EV Race these days.
And that’s why we love Rivian stock here and now.
Hypergrowth Stock #2: Opendoor (OPEN)
For those who are unfamiliar, Opendoor (OPEN) is the world’s largest iBuyer. The company uses technology and data science to buy homes from sellers virtually. It then turns around and uses that same approach to sell those homes to prospective buyers.
We love this business model. We think it’s genius. It dramatically improves the archaic, universally-hated home-buying model. Specifically, Opendoor makes the home-shopping experience:
- Cheaper – it axes profit-taking middlemen (real estate agents) and replaces their often-flexible 6% commission with a 5% flat transaction fee.
- Faster – Opendoor’s advanced data science methods accurately price a home in minutes. And sellers can close a sale in as few as three days.
- Easier – Opendoor allows folks to literally sell their home from their mobile phone with just a few clicks.
- Simpler – Opendoor simplifies home-selling into a unified process between just the seller and Opendoor. Say goodbye to disjointed and complicated sales between multiple parties.
- More convenient – Opendoor allows sellers to choose their closing dates and escrow periods, enabling the flexibility to move on their own time.
- More reliable – Opendoor’s offers are all-cash. And its transactions never fall through because it “fails to qualify” – something that happens quite often in the home-selling process.
From a consumer advantage perspective, Opendoor is creating a superior way to buy and sell homes. It’s the future of home shopping. By 2030, we believe a large majority will use Opendoor to buy and sell homes. It’ll be much the same way shoppers today use Amazon (AMZN) to buy goods instead of going into Walmart (WMT) or Target (TGT).
To that end, we see Opendoor as an early stage “Amazon of Houses.”
For those concerned about profits, worry not. Opendoor has positive gross and EBITDA (earnings before interest, taxes, depreciation, and amortization) margins already. And the company is still in its very early days of growth. It takes a 5% commission on every transaction and earns money via home appreciation through its typical 90-day holding period.
At scale, the company should be able to net gross margins north of 10% – driven by a mix of the commission fee and housing price appreciation. That’s very similar to what Amazon’s retail business nets on its gross margins. Economies of scale have enabled Amazon’s retail business to become very profitable. Similarly, economies of scale will enable Opendoor to be very profitable one day, too.
And even in a down housing market, Opendoor has enough liquidity (over $2.5 billion in cash on the balance sheet) to weather some near-term turbulence. It’s also worth mentioning that the housing market has a very strong upward bias. It usually goes up. About once a decade, it goes down. And when that happens, the downturns tend to be very short-lived. Within a few months, the housing storm will pass. And Opendoor will be back to firing on all cylinders. So, a down housing market won’t stop this formidable company.
In fact, after recently proving the resiliency of its business model in a housing market slowdown, OPEN took flight. Though the headline numbers were mixed, they underscored that Opendoor will not lose a lot of money in this slowdown.
Second-quarter numbers topped estimates across the board (volumes, ASPs, revenues, earnings, and margins). Topline KPIs are slowing – volumes and ASPs dropped sequentially – and guidance came in well-below estimates. Still, the market was quite impressed with the quarter, thanks to the company’s margins.
Gross margins expanded to near record highs. EBITDA margins did reach record highs. And next quarter, EBITDA losses are expected to be very shallow, even against the backdrop rapidly slowing housing market.
In other words, the big concern with Opendoor has always been that this company will lose a lot of money in a housing market slowdown. But that’s not the case. Opendoor is simply slowing the pace of its acquisitions, focusing on high-quality inventory, and relying on its pricing algorithms to drive continued positive contribution margins and barely-negative EBITDA amid this turbulent time.
That’s really bullish. Turbulent periods in the housing market don’t last long. So, when this period ends, Opendoor is positioned to grow like wildfire for the next 10-plus years.
Hypergrowth Stock #3: SoFi (SOFI)
One of my favorite long-term growth stocks to buy today is fintech disruptor SoFi Technologies (SOFI).
In fact, for what it’s worth, all my favorite growth stocks are up more than 55% since mid-June. They’re crushing the Dow Jones, S&P 500, Nasdaq, Cathie Wood’s ARK Innovation ETF (ARKK), and Warren Buffett’s Berkshire Hathaway (BRK) by a mile.
Despite these huge gains since the stock market bottom, SoFi stock has been a big laggard. It’s up “only” 17% since mid-June.
We think that’s about to change in a big way.
Yesterday, the U.S. government confirmed that the continued extension of the student loan moratorium will end in about four months. For the past year, this loan repayment pause has been the biggest headwind weighing on SoFi stock. We believe this confirmation awakens a latent catalyst that will supercharge SoFi stock. And it could send shares about 250% higher over the next six months alone.
The time to buy is now.
Here’s a deeper look.
We’ve long said that SoFi is a 100%-growth company disguised as a 50%-growth company.
In short, that’s because every business line at SoFi is growing about 100% year-over-year, except for its student loan business. Due to the pandemic-era decision to pause student debt payments, that’s been shrinking. The shrinkage in the student loan business is causing a would-be 100%-plus topline revenue growth rate to be about 50%.
Just look at last quarter’s numbers.
Total members rose by 70%. Personal loan originations climbed 91%. Money product growth was 92%. Invest product growth was 89%. Credit card product growth was 227%. Relay product growth was 115%. At Work product growth was 117%.
On average, you’re talking about a growth rate of just under 115%.
But concurrent to that triple-digit growth everywhere else, student loan originations dropped 54% last quarter. That’s a massive plummet. It’s been happening for a while, and it’s due exclusively to the current student loan moratorium.
Remove that, and suddenly, SoFi goes from a ~50% growth company to a ~100% growth company.
Well, yesterday, the White House confirmed that the student loan moratorium will end in 2023. U.S. President Joe Biden announced he’d forgive about $10,000 in student debt per person (if they’re making less than $125,000). And he’s extending the current pause in student loan payments to December. But he also announced this is the final extension and that borrowers should plan to resume payments in January 2023.
That’s huge news for SoFi. When those payments do resume, student loan origination growth will go from -50% to +50%. And, as that happens, SoFi will morph into a 100%-growth company.
Of course, such a significant transformation of the growth profile will send SoFi stock higher.
How much higher? The fundamentals and technicals say a lot higher.
Per our analysis, SoFi stock is one of the most undervalued growth stocks in the market today. And consequently, as its valuation normalizes with a revenue growth surge in 2023, it has a ton of upside potential.
As stated earlier, SoFi will likely see its growth rates move above 100% in 2023. This is enormous growth for any company but especially so for a consumer finance company. Indeed, across the whole consumer finance industry, the average revenue growth rate currently is about 10%.
Therefore, SoFi is growing about 5X to 6X faster than the average consumer finance company. And it has the potential to grow more than 10X as fast in 2023.
Naturally, you’d expect a company growing 5X to 6X the industry norm to have a stock trading at 5X to 6X the industry-norm valuation, too. Growth and valuation should be correlated.
But that’s not the case with SoFi stock. And that’s the opportunity.
SoFi stock is trading at just 1.1X its book value. Your average consumer finance stock – growing 5X slower – trades at 2.2X book value, about double SoFi’s valuation multiple.
In other words, considering its growth profile, SoFi stock is dirt-cheap. And that growth profile will only dramatically improve from here.
As it does, we fully expect SoFi stock to turn into one of our biggest winners.
Looking at the chart, SoFi stock looks primed for a big breakout.
The stock was stuck in a multi-month decline from November 2021 until April 2022. From April to today, the stock has been in a sideways consolidation pattern. Normally, stocks enter these consolidation periods when they’re prepping for either a big move higher or a big move lower.
Recently, the stock has started to break to the upside of this consolidation channel on pretty big volume. That’s mostly thanks to strong earnings and the new student debt forgiveness decision. When coupled with the strengthening fundamental backdrop, this improving price action strongly suggests that the current consolidation pattern in SoFi will resolve in a brand-new uptrend.
We think that uptrend could look a lot like the previous downtrend – but in reverse.
That downtrend pushed SoFi stock from nearly $25 to $5 in just over seven months. Mirroring that, a new uptrend could elevate the stock from $5 back to nearly $25 by early 2023. That implies a gain of more than 250% over the next seven months alone.
We search for the most disruptive and promising early-stage companies positioned to grow like wildfire over the next decade. And we hope to score their investors small fortunes.
SoFi fits that bill. It’s the future “Amazon of Finance.” It will do to Bank of America (BAC) and Wells Fargo (WFC) in the 2020s what Amazon (AMZN) did to JCPenney and Sears in the 2010s. As that happens, SoFi stock will score early investors 10X (and perhaps even bigger) returns.
Hypergrowth Stock #4: Adobe (ADBE)
We believe right now is a good time to start accumulating. Why? Because stocks will soar over the next 12 months. Yes, they may go lower over the next few weeks. But the 12-month outlook is VERY bullish, and the downside risk feels very limited here, so we believe it’s time to start getting into some trades.
Remember our strategy: Nibble at 3600. Bite at 3400. Chomp at 3200. We’re nibbling today.
And it’s on our favorite fallen tech giant: Adobe (ADBE).
Adobe is the leading creative media software provider in the world. The firm has built a multi-hundred-billion-dollar empire on the back of providing designers, artists, marketing teams, and more with the tools they need to craft the best visual digital media.
This has been one of the highest-quality tech stocks of the past decade. The shift toward visual digital media content creation, consumption, and distribution has created secular demand tailwinds for Adobe’s products, which has powered steady double-digit revenue growth every single year. Adobe has simultaneously established a monopoly of sorts in this industry, giving it tremendous pricing power and allowing it to operate at ~90% gross margins. The software-centric nature of the business model has also kept operating and capital expenses quite minimal, leading to huge 40%-plus profit and cash-flow margins.
In other words, this company has historically embodied the quintessence of growth and profitability. And that led to its stock consistently being one of Wall Street’s biggest winners throughout the 2010s.
That has changed dramatically in 2022. The company’s growth rates have begun to slow, partially due to challenging macroeconomic conditions and partially due to encroaching competition. As to the latter, Adobe has responded by essentially buying out its competition – like Figma – but it’s overpaying for those acquisitions. Meanwhile, on the macro front, Adobe is a victim to the Fed and strong dollar.
Consequently, Adobe’s growth rates have decelerated sharply this year, and the stock has crashed. We think it’s time to buy the dip.
Adobe’s growth rates are not slowing that much, and the company remains the heavyweight400-pound gorilla in a secular growth industry. This will remain a 10%-plus revenue growth firm for the next five-plus years, with room for accelerated growth through Figma, Frame.io, and its newest brands. Gross margins will stay high. And operating margins should improve with scale.
Overall, we believe ADBE has this is a ~15% EPS growth potential over the next five years, which is only marginally slower than the company’s long-term EPS growth rate in the 2010s.
However, ABDE stock is now trading at its cheapest valuation in 10 years, with a 19.5X enterprise multiple (EV/EBITDA) ratio that is significantly below its historically normal valuation.
The bears argue the lower valuation is warranted given the slower growth.
But growth is only marginally slowing, while the valuation is tremendously lower. When factoring in the growth prospects of the business, the company’s EV/EBITDA-adjusted price/earnings to growth (PEG) ratio is 1.25 – also its lowest in a decade.
In other words, no matter which way you slice it, ADBE stock is as cheap as it’s been in a decade.
That doesn’t necessarily mean it’sits “too cheap.” It could just mean that ADBE stock was overvalued for a really long time and is now normalizing to a “fair valuation.” But that isn’t the case.
Let’s do the mental math here.
Adobe’s revenues this year are expected at $17.6 billion. This is easily a 10% to 15% revenue grower over the next five years. That puts revenues around $32 billion by 2027. Operating margins will clock in around 50%, putting operating profits at $16 billion. Taking out 20% for taxes and dividing by 480 million shares out, that puts 2027 projected EPS at $27.
Systems software stocks of this ilk have historically averaged a 25X forward earnings multiple. A 25X forward earnings multiple on 2027 estimated earnings of $27 implies a 2026 price target for ADBE stock of $675. Discounted back by 10% per year, that implies a 2022 price target of about $460. For what it’s worth, Morningstar’s fair value estimate on ADBE stock is similar, right around $450.
We believe ADBE stock is fundamentally very undervalued.
The technicals also point to a short-term rebound.
ADBE’s Relative Strength Index plunged into oversold territory last week and has since climbed back above 30. That’s bullish. The stock has done this three times over the past 10 years, and each time, it led to a near-term 20% to 30% rally. If history repeats, ADBE stock could be on course for $350-plus prices in the near future.
Meanwhile, ABDE stock is trading 30% below its 200-day moving average (MA). This has historically represented the point of “max pain” for ADBE. Even at its worst points over the past 40 years, ADBE stock never traded much more than 30% below its 200-day MA.
Indeed, the stock has only hit this “max pain” point five times before. Each time was at or close to a multi-year bottom and was followed by a massive multi-year surge in the stock.
Overall, then, what we have with ADBE stock is a once-in-a-decade fundamental and technical entry point into one of the highest-quality companies and stocks in the world.
Does that mean ADBE stock won’t go lower? No. We actually think ADBE stock could go lower from here over the next few weeks. It’s entirely possible.
But it won’t go much lower. And in 12 months, the stock will be much higher. In three years, it’ll be even higher – and even higher in five years.
Buy ADBE stock today. Secure yourself a low price in a generational growth asset. Wait for the market volatility to pass. Ride the stock toward $400, $500, $600, even $1,000 over the next few years.
Hypergrowth Stock #5: Palantir (PLTR)
Forget money. In the business world, data is king.
It can help businesses create better products, enhance marketing campaigns, reach targeted customers, and glean sentiment.
Data can assist with mitigating risk, predicting business outcomes, optimizing supply chains, streamlining functions, and automating various processes.
For a business, data can do everything.
It should be no surprise, then, that a 2020 Forrester Consulting survey found that data-driven organizations are 58% more likely to beat revenue goals than non-data companies. Further, a 2021 Gartner survey found that in 75% of large organizations, the office of chief data officer is seen as a mission-critical function, on par with IT, business operations, HR, and finance.
Welcome, friends, to the Intelligence Economy — a new era where enterprises are unlocking the power of big data to drive better business outcomes.
And in today’s world, it’s dog eat dog — if you don’t adopt data-driven decision-making, you’ll be driven out of business by someone who does.
To that end, the Intelligence Economy boom has only one ending — where, by 2030, every business in the world is data-driven.
And yet, a 2019 New Vantage survey found that only 31% of companies have pivoted to data-driven decision-making.
This delta between the current state of the enterprise market (less than one-third adoption of Big Data software) and its future state (100% adoption) implies enormous growth potential for the Intelligence Economy over the next decade.
More specifically, it means that the companies at the epicenter of intelligence — the AI firms creating analytics software — are poised for significant revenue growth in the 2020s.
The time to invest in these often still-small AI/Big Data stocks is now because they won’t be small for long.
So we are going to tell you about what we believe is the best data analytics firm in the world. This company has built a “better mouse trap,” if you will, in the Big Data space. Its platform and solutions are technologically unrivaled. Though that platform is still in its early stages, it’s growing very quickly. Long-term, we think this company can become the “Microsoft of Data.” And if that does happen, the stock will easily 10X.
The company we’re talking about is Palantir (PLTR).
Palantir is a revolutionary data science firm that’s pioneering a next-gen approach to analytics, which it hopes will be standardized across the industry.
It was founded in 2003 to develop advanced software for the U.S. intelligence community, aimed at assisting in counterterrorism investigations and operations. And of course, the technology the company has built to do that is world-class.
Since 2003, Palantir has grown this government-focused data science platform by leaps and bounds. Today, Palantir’s platform is considered the “gold standard” in government data analytics and has been used to power emergency non-combatant evacuation operations from Afghanistan, complete the U.S. vaccines program from clinical trials to jabs in arms, help identify a $200 billion Russian money laundering operation, and run the Public Safety Power Shutoff program to mitigate wildfire risks.
Palantir is now further commercializing that technology by expanding into corporate America. And such developments have been wildly successful. Last quarter, commercial revenues rose 47% year-over-year, paced by 132% growth in U.S. commercial revenues.
Palantir plans to continue its rapid scale in government and commercial businesses via new customers, new product launches, and higher usage fees. Behind that growth engine, Palantir’s management team expects the company to grow revenues by more than 30% per year over the next few years.
Palantir went public via a direct listing in late 2020. That listing reference price was $7.25. The stock opened at $10 and shot as high as $40, but it’s since come crashing back down to $10 and change.
Data science is the future, and the opportunities related to government and commercial data science are enormous. Palantir pegs its total addressable market at north of $100 billion. The company will do just $2 billion in revenue in 2022. Therefore, the growth runway here is long and compelling.
Our research suggests that Palantir has the best tech in the data science game. Its platform is by far and away the most capable. And we firmly believe that in the long run, the best tech always wins out. Therefore, Palantir is likely to become the biggest player in a $100-plus billion market.
The management team is stellar. In short, a group of intelligent Stanford-connected folks have teamed up with legendary VC Peter Thiel to lead this business, and they’ve attracted top exec talent from across Big Tech.
The engineering team is as good as it gets. You have a bunch of top engineering grads and former Amazon (AMZN), Microsoft (MSFT), and Google folks building and improving the tech every day.
The business model is highly scalable with nearly 80%-plus gross margins and is already massively EBITDA profitable (margins of 35% last quarter) even with ~50% revenue growth.
The stock has been crushed and offers a compelling entry point at current levels.
Palantir is expected to do about $2 billion in revenues this year. Management expects revenues to grow by more than 30% per year over the next few years. We think revenues will grow at a 30%-plus compounded annual growth rate over the next 10 years. Assuming so, 2032 revenues will likely measure around $30 billion.
This is an 80%-plus gross margin business that reminds us of an early-stage Microsoft. Microsoft operates at 40%-plus operating margins today. That seems doable for Palantir. Assuming a 20% tax rate, that would imply about $10 billion in net profit potential for Palantir. A 20X price-to-earnings multiple on that implies a long-term valuation target of $200 billion.
Data is the new oil. It’s the king of the global economy. Recent political developments have only emphasized the importance of securing and using good data in operations. As such, we expect this already-hot industry to heat up even more over the next 12, 24, and 36 months. During that stretch, we believe Palantir will increasingly cement itself as the de facto data science leader. If the company does that, the stock will soar.
It’s that simple.
Finding Apple in the Garage
What would you do with a million dollars?
That’s a very real question early investors in Tesla needed to ask themselves after the company grew more than 700% in 2020 alone…
Those who bought Tesla at its all-time low and held onto it through its 2021 high, have gained more than 18,000%.
That’s enough to turn a $10,000 stake in 2010 into $1.8 million.
They call them “Teslanaires.” And they truly understand the power of asymmetric bets.
When it comes to exponential wealth creation, few things compare to owning a small company that becomes a large company.
Look at Dell, which made early investors more than 91,000% through the ‘90s.
That’s the kind of exponential growth that transforms a $5,000 stake into $4.5 million.
Think about that for a moment…
It means that investors in the ‘90s didn’t need to invest in Microsoft (MSFT), which rose an astonishing 9,000% throughout the ‘90s…
You could have even missed out on EMC, whose performance in the ‘90s would have turned your $5k into more than $3.5mm.
Of course, those who invested in all three would clearly take the cake… but the point is that all it takes is one.
Just one of these winners is all investors need to make a huge amount of money in small-cap stocks with massive upside.
Which is why my approach is to look at companies through the lens of a venture capitalist.
VCs are the grand-slam hitters of the investment world.
Instead of hoping to make 300% on a stock, they aim for 3,000%, or even 30,000%.
If you only make just one great VC-style investment in your life, you’ll probably never have to worry about money again.
VCs are the early backers of pretty much every major tech company you can name, from Google to Facebook to Twitter to Uber to Airbnb… the list goes on and on.
Before the public even got wind of these innovative businesses, venture capitalists were already doing their due diligence and deploying large sums of money.
While this report isn’t about investing in early-stage companies in the private sphere, I do consider the venture capitalist mindset the right one to employ.
Why? Because I am a venture capitalist.
I’m also young, if you haven’t noticed it yet.
I’m just 25 years old. But my resume speaks for itself.
I graduated from Caltech, one of the most prestigious schools in the country. Caltech is a school where running into immovable problems wasn’t just a footnote in the proverbial book of a long semester… it was the entire chapter.
To get through, I needed to find innovative solutions to these problems all of the time.
I encountered the same problem-riddled environment during the starting and founding of three successful businesses… all while I was attending Caltech.
One of these companies was a social media startup. Another was an equity research company. And yet another was a sports data analytics business.
In other words, I’ve been there and done that. I know exactly what to look for in a home run play.
Editor, Hypergrowth Investing