A lot has changed since I wrote about this concept a couple years ago: https://discussion.fool.com/market-cap-thinking-34004504.aspx
A lot of companies have grown more and faster than I could have imagined then, and I can imagine quite a bit. https://www.youtube.com/watch?v=rZBHits8JPI
They have done so well that they’ve become large companies.
Docusign is now a $38 billion company. ($38b is their market cap)
Zoom is now a $76 billion company.
Twilio is now a $39 billion company.
These are all going to have $1 or 2 billion or more in revenue this year, so these valuations seem reasonable to me, and I could even see them doubling or tripling easily…though depending on revenue growth rate, it could take several years.
Then there’s Shopify, now a $111 billion company. If it were to even double, it would be larger than Salesforce or Adobe. It’s worth considering if that makes sense. These companies have many times the revenue that Shopify has. How long can it grow revenue rapidly? Will it pass these still growing SaaS behemoths? How long will it take them to get there?
Likewise, Datadog, now a $29 billion company, will probably have between 600 or 700 million in revenue this year (565 is their lowball guide). They will have to keep torrid growth for several more quarters to prove they’re worth nearly as much as Docusign or Twilio. Will they pass these multi-year performers? How long will it take them to get there?
The companies I feel are most likely to grow 2x or 3x in the next couple years are Crowdstrike, Fastly, and Zoom. Crowdstrike will flirt with 800 or 900 million in revenue this year and is still a $22 billion company. Why is its market cap not about 50% higher? You’ve got me! They’re growth rate is about like Datadog’s, but maybe the market thinks DDOG can sustain their growth rate longer than CRWD.
Little Fastly will barely top 300m in revenue this year, but it’s also just an $8 billion dollar company. Plenty of room to grow revenue at a very rapid pace!
Zoom is the outlier. It became a large company overnight, but I am betting on them to keep innovating and therefore growing rapidly. Companies like Zoom don’t come along often. Can they grow revenue to 5 billion each year? 10 billion? If so, it’s easy to see them printing profits, and it’s easy to see how ZM’s market cap could double or triple in just a few years.
As I point out above with Datadog, there are many things to consider when trying to guess what a company’s market cap could become in the future. So many that some (Saul included, for the most part, I think) don’t bother to guess. I’m certainly in that camp when companies are small. But at some point (perhaps somewhere between 1b and 2b in annual revenue…for any company not named Zoom?) we must concede that hyper-growth is not realistic. And hyper-growth is a big reason why these companies can defy expectations.
Livongo is in an interesting spot. They are tiny, around the revenue Fastly has. (Maybe they’ll even hit 400m this year, but then Fastly could surprise too.) Livongo is growing even faster than FSLY. They’re also valued a little higher as an $11 billion company. But if their growth is sustainable, this is a huge bargain. I’m straddling the fence with a small position.
Roku is a larger position for me. They should crest $1 billion in platform revenue (high margin, non-hardware) this year. With their lower gross margin than some others mentioned here, it’s understandable that they’re valued a little lower, but at $18 billion currently, they could be a much bigger company if their success continue at such a rapid pace. Sustainability is, as always, the most important question.
Do you have any companies that you feel could be a lot larger in the next few years? Please tell us about them. Why do you feel that they could be larger? For instance, are they growing revenue extremely rapidly? Tell us why you think this is sustainable.
After all, companies that can be a lot larger in the near future…that’s what this board is about. We’re fortunate to have found many of them. I’m looking for some new candidates.