This is one way that I look at my investment opportunities. I look for companies that I believe can increase 10x in 5-7 years. Put another way, I avoid investing in companies that I believe cannot grow 10x in 5-7 years. This does not mean that I think that all of my companies will increase 10x in that timeframe. The timeframe is very important because what is really important is the overall performance of the entire portfolio.
So 10x in 7 years is a CAGR of 39%
while 10 in 5 years is a CAGR of 59%
Let’s look at this for each year of the 5 or 7:
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 20% 1 1.2 1.4 1.7 2.1 2.5 3.0 3.6 30% 1 1.3 1.7 2.2 2.9 3.7 4.8 6.3 34% 1 1.3 1.8 2.4 3.2 4.3 5.8 7.8 35% 1 1.4 1.8 2.5 3.3 4.5 6.1 8.2 38% 1 1.4 1.9 2.6 3.6 5.0 6.9 9.5 39% 1 1.4 1.9 2.7 3.7 5.2 7.2 10.0 40% 1 1.4 2.0 2.7 3.8 5.4 7.5 10.5 50% 1 1.5 2.3 3.4 5.1 7.6 11.4 17.1 58% 1 1.6 2.5 3.9 6.2 9.8 15.6 24.6 59% 1 1.6 2.5 4.0 6.4 10.2 16.2 25.7 60% 1 1.6 2.6 4.1 6.6 10.5 16.8 26.8
Saul has achieved roughly 34% annualized over 26 years which is 4.3x every 5 years and 7.8x every 7 years. If you pick companies that you believe can go up 10x you’re probably not going to stick with them for the whole 5 or 7 years because your view of 10x probably changes as they move toward 10x. In other words, growth likely slows down.
Let’s look at NVDA. To get on the 10x in 5 years trajectory, it needs to increase by the following amounts:
+59% by October 2019 $315
+150% by October 2020 $495
+300% by October 2021 $792
+540% by October 2022 $1267
+900% by October 2023 $1980
To get to 10x in 7 years, it needs to increase by the following amounts:
+39% by October 2019 $275
+90% by October 2020 $376
+170% by October 2021 $535
+270% by October 2022 $733
+420% by October 2023 $1030
+620% by October 2024 $1426
+900% by October 2025 $1980
As I posted previously, it seems quite clear that from today’s price NVDA can easily be to the 10x path in 5-7 years for at least the next 2 years. In fact, I believe it should and will which is why I moved my money into it. I think that the chance of NVDA getting knocked off of this path (based purely on fundamental reasons related to its business, its competition, and the environment in its markets) is much lower than for any other company that I own. You see NVDA is less fragile and less subject to disruption. NVDA is just expanding into new markets with its already proven offering (proven by its almost universal market acceptance), and the path to expansion into new markets is already underway with a clear path. This is why I see the risk to very large returns as low. NTNX looks good but it is competing with VMWare which makes it less attractive because viable competition can always threaten margins. AYX is doing well but with data analytics there is a greater chance for disruption. TWLO has a huge head start and the advantages of scale, trust, company stability (compared to smaller companies), and other advantages. SQ has a tremendous ecosystem which makes it sticky and less vulnerable to margin erosion. These are all great investments and I own them all. But if I had to rank them in order of CAP (competitive advantage period) the order would be as follows (biggest advantage to lowest):
Some of you may have heard of the recently coined Tinker ratio which considers Growth, Relative Valuation, and CAP. I think this is a good way of considering which stocks to own and how to allocate investment dollars. I think, though, that there deserves to be a fourth factor added to the Tinker Ratio. I would what capacity for profitability. Tinker refers to the this as the ability of a firm to print cash which is the ultimate goal of any for profit business in a capitalistic environment. One can evaluate cash printing capacity by examining gross margin, operating margin, projected improvement in operating leverage, and the outlook of these factors into the future (e.g. will competition erode margins in the future). Sure, one can argue that the CAP and Relative Valuation already consider such, but if one want to get a little more quantitative then adding this fourth factor can help inform on allocation and investment decisions. For example, AYX has a 90% gross margin while TWLO has a 55% gross margin. NTNX has a 80% gross margin (I think) on SW and support. The operating expenses are important here too. Are they coming down as a percentage of revenue? How fast? When will cash be printed?