All investors want to own stocks that go up five times, 10 times, or even more than their purchase price.
There is no easy way to find these popup actions. They are often disruptive, but not all businesses with a disruptive concept actually change their industry. High revenue growth is a good clue, but even more important is that they are steadily gaining market share compared to their (often much larger) competitors.
Gaining market share alone does not make a company successful – many early stage disruptors are not profitable and the profits have to come eventually. But that is usually easier with a larger market share, as it allows a company to achieve economies of scale.
Image source: Getty Images.
Unlike revenue or profit, finding a company’s market share isn’t always clear cut. Most companies do not publish this information and the boundaries of a given market are not always well defined. Some companies, like red fin
They publish market share data in their earnings reports, and many companies, especially in the tech sector, will tell you what their target market is so you can determine your market share by taking revenue as a percentage of that. With other companies, you may find data from third-party sources such as eMarketer in eCommerce, Nielsen
in the media, or trade magazines and research firms in other industries.
Often the best way to determine if a company is gaining market share is simply by comparing its revenue growth to that of its peers. If a business can do that over a long period of time, it can generate huge profits.
Let’s take a look at three of these success stories.
1. The conquest of Amazon retail
Since its initial public offering (IPO) in 1997, Amazon (AMZN 2.99%)
has generated a return of nearly 100,000%, which would make $1,000 invested in the company in its initial public offering worth about $1 million at recent prices.
Most investors are familiar with the history of the company. It gradually expanded from its beginnings as an online bookstore into new categories, adding its third-party marketplace, Prime membership program, devices like the Kindle, and eventually its cloud computing giant Amazon Web Services (AWS).
But what’s notable about founder Jeff Bezos’ strategy is that he focused on gaining market share rather than turning a profit, believing that market share would allow Amazon to incorporate more profitable businesses, which it has done in areas like advertising, its thirdparty services. marketplace, and even AWS, which started out serving Amazon’s e-commerce business. Market share gave him control over the customer, which allowed him to do other things.
The graph below shows how Amazon’s revenue growth compares to that of Walmart
the retail giant that once dismissed the threat of e-commerce.
AMZN revenue (year-over-year growth) data by YGraphics
As you can see, Amazon has gained market share from Walmart throughout its history, and today it has nearly as much revenue as Walmart. That’s a big part of the reason for Amazon’s success.
2. The takeover of Netflix on TV
like amazon, Netflix (NFLX) 0.81%)
It started small and was ignored by industry headlines for years. But transfer of shares
It has generated a 27,000% return since going public in 2002, turning $1,000 into roughly $250,000 at recent prices.
While it would take a while for the profits to trickle down to Netflix, it took over market share in the DVD rental business, eventually leading to Blockbuster’s bankruptcy. Now it’s doing the same with the cable TV industry, with several legacy media companies joining the streaming fray.
Perhaps the best way to gauge Netflix’s market share gains is by its subscriber base. In its most recent quarter, Netflix had 73.4 million paying members in North America, or just over half the total number of households (about 140 million).
That number has grown steadily throughout Netflix’s streaming history. Ten years ago, only 28 million households in North America paid for Netflix.
Meanwhile, pay-TV subscribers, which include cable, satellite and telecommunications, have fallen to 77 million from more than 100 million a decade ago.
Netflix’s victory over the traditional cable package is one of the main reasons for the company’s success.
3. Tesla’s entry into electric vehicles
You are there (TSLA) -0.94%)
shares have risen more than 7,000% at recent prices since the electric vehicle (EV) company went public in 2010, and the company has overcome major hurdles to make conventional electric vehicles
In the USA
While the company’s greatest achievements may have to do with engineering, one reason the stock has been so successful is that it quickly gained market share in a huge market, automobiles, making it clear that electric vehicles are the vehicles of the future.
Just as Amazon grew over time by gradually taking market share from brick-and-mortar retailers, Tesla has grown from automakers as well. As the graph below shows, Tesla has grown revenue rapidly in a large and mature industry.
TSLA Revenue (Year-Over-Year Growth) data by YGraphics
As you can see in the chart above, Tesla has grown revenue in high double digits for much of the past eight years, while national peers like Ford
Y general motors
they’ve been stuck with low single-digit growth, or even multi-year negative growth. Although Tesla’s revenue is still about half that of the major domestic automakers, it is quickly surpassing them and could become the largest US automaker by revenue in just a few years.
When you’re looking for ten baggers, market share shouldn’t be the only factor to consider. You want to make sure you understand why the company is gaining market share, whether the gains are sustainable, and whether it has an economic moat. Also, there has to be a path to profitability. If the companies you take market share from are profitable, that’s a good sign that a disruptor can be profitable.
It’s rare to find a stock that meets all of these conditions, but when it does, it can generate life-changing returns.