10x in 5-7 years

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):

NVDA
SQ
TWLO
AYX
NTNX

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?

Chris

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But if I had to rank them in order of CAP (competitive advantage period) the order would be as follows (biggest advantage to lowest):

NVDA
SQ
TWLO
AYX
NTNX


Agreed. I view SQ as safer but TWLO as more LT upside due to current mkt caps.

I put TTD even with TWLO in my mind.

I really like AYX but i do question moat and lack of cloud-focus currently. Expect they do great, just higher risk imo.

Similar feelings about MDB but rank them above AYX.

I love ZS but hate the valuation.

So, yeah…NVDA.

Dreamer

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Share price is grossly misleading here

NVDAs market cap is $120B

You are asking how quickly they can get to a $1.2T market cap

Which is 20% higher than any market cap in the market currently.

So your question really is - do you believe NVDA - a solid company in a phenomenal space - will have a much harder time reaching $1.2T than AYX would reaching $30B or TWLO would reaching $68B or ZS would rescuing $40B or SHOP would reaching $140B

I would bet on all four mentioned after NVDA here in this kind of race. I was not investing during NVDAs growth and I’m okay with that. My goal is to catch the next wave of growth in a way that maximizes returns.

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So your question really is - do you believe NVDA - a solid company in a phenomenal space - will have a much harder time reaching $1.2T than AYX would reaching $30B or TWLO would reaching $68B or ZS would rescuing $40B or SHOP would reaching $140B


I dont see nvda reaching 1.2T…but i dont see any of the above reaching those valuations either, except TWLO because it is in a massive Communication market.

You have to be not only have the majority of mkt share, but you also need to be in a category that has a massive TAM. Alteryx is no where close to being a market leader in data analytics to the extent nvda is with GPUs.

ZS is awesome, but PANW and CSCO and dozens of others will be vompeting in the security space.

TWLO is a bit more niche but CSCO is coming their way…but i think plenty of total TAM for TWLO to get to 10x one day.

SHOP is more unique, but in the future there may simply be WIX types and/or AI capabilities embedded in all cloud titans that makes SHOP either obsolete or at least keeps them in check.

I think the issue here is timeframe. I said this on NPI yesterday, based on Fridays stock prices:

Best 6-month outlook from here? NVDA
Best 1-year outlook? Lot’s of ties, imo. So expect I will pare off NVDA gains into others over time.
Best 2-year outlook? TWLO, TTD, BZUN, if I had to guess.
Highest risk/reward via acquisition: AYX, MDB, ZS.
Best 5-year outlook? (but I am not the type to just “set it and forget it”) ZS, TWLO, MDB, TTD, IQ.
If Trade war with China put to rest, then revise the above accordingly with stronger showings for IQ/BZUN.

Dreamer

10 Likes

If you ask me which company would double or triple into their opportunuty first it’s a different question.

But market cap is more important than price.

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If you ask me which company would double or triple into their opportunuty first it’s a different question.

But market cap is more important than price.

Neither market cap nor price should be looked at in isolation.

Market cap is really only important when considered together with the remaining open opportunities ahead of the company. If NVDA had $10B in sales last year (don’t recall the exact figure but $10B is close), ask what will the sales for NVDA be in 7 years. Can they hit $100B in sales in 2025/2026? To gauge that look at the size of the markets that they are and will target. Don’t get bogged down by the current $120B market cap and arbitrarily say $1.2T is too big, no has done it so it’s impossible. People underestimate, IMO, growth in its current markets and also underestimate the size a number of new, future markets for NVDA.

Chris

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This is a great thread.

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More often than not, the market leader, the more established player with a bigger market cap, will continue to grow over time better and faster than the small up and comer trying to dislodge the leader. An example would be if you bought 3com stock instead of Cisco because 3com had a smaller market cap thus more upside potential. It is a horrible strategy. The larger more established company has the resources necessary to continue to dominate the market. Of course there are except like anet these days vs. CSCO, but there has to be a very compelling argument to buy the small fry other than its smaller thus can go up more.

A few years ago I frequented the new paradigm investing board with my old user Id and discussed AAPL and whether it was worthy of investment dollars.
https://discussion.fool.com/aapl-wow-29801639.aspx?sort=whole#29…

I felt it was a resounding yes, despite aapl’s previous price appreciation and large market cap. It went on to appreciate 39% annualized after that discussion, right around your target.

Today I would apply that logic to NVDA today as an excellent investment regardless of its market cap, definitely a better buy than smaller AMD. You can’t let market cap be a factor. You have to look at growth opportunities relative to the size of the company now.

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