Are you looking for the next top ten payer? Focus on market share

Every investor wants to own a stock that will rise five times, 10 times, or even more than the purchase price.

There is no easy way to find these breakout stocks. They are often disruptors, but not every company with a disruptive concept actually goes on to transform their industry. High revenue growth is a good guide – but more importantly, they are steadily gaining market share over their (often much larger) competitors.

Gaining market share alone does not make a company successful – many early-stage disruptors are unprofitable, and profits must come eventually. But this is often easier with a larger market share, as this allows the company to achieve economies of scale.

An investor looking at several screens with charts.

Image source: Getty Images.

Unlike revenue or earnings, finding market share for a company isn’t always straightforward. Most companies do not publish this information, and the boundaries of a particular market are not always well defined. Some companies like Redfin, publish market share data in their earnings reports, and many companies, especially in the technology sector, will tell you their addressable market so you can determine their market share by taking revenue as a percentage of that. With other companies, you can find data from external sources such as eMarketer in e-commerce, Nielsen In the media or trade journals and research firms in other industries.

Often the best way to determine if a company is gaining market share is to simply compare its revenue growth to that of its peers. If a company can do this over a long period of time, it can generate huge returns.

Let’s take a look at three such success stories.

1. Amazon’s foray into retail

Since its initial public offering (IPO) in 1997, Amazon (AMZN 2.99%) A return of nearly 100,000% would make the $1,000 invested in the company in the IPO worth nearly $1 million at recent prices.

Most investors are familiar with the company’s history. It gradually expanded from its beginning as an online bookseller into new categories, adding a third-party marketplace, Prime membership software, devices like the Kindle, and eventually cloud computing giant Amazon Web Services (AWS).

But what was notable about founder Jeff Bezos’ strategy was that he focused on gaining market share rather than making profits, believing that market share would allow Amazon to focus on more profitable businesses — which it did in areas like advertising, third-party marketplaces, and even AWS, Which started serving Amazon’s e-commerce business. Market share gave her control over the customer, allowing her to do other things.

The graph below shows how Amazon’s revenue growth compares with Amazon’s revenue growth Walmartthe retail giant that once dismissed the threat from e-commerce.

AMZN Revenue Chart (YoY Growth)

AMZN Revenue (YoY Growth) data by YCharts

As you can see, Amazon has gained market share over Wal-Mart throughout its history, and today it has nearly as much revenue as Wal-Mart. This is a big part of why Amazon is so successful.

2. The acquisition of television by Netflix

like amazon, Netflix (NFLX 0.81%) It started small and was ignored by industry incumbents for years. But the stock flow It’s returned 27,000% since its IPO in 2002, turning $1,000 into nearly $250,000 at recent prices.

While it may take some time for profits to come in to Netflix, it has taken market share in the DVD rental business, eventually putting Blockbuster out of business. It’s now doing the same for the cable TV industry, with a number of legacy media companies joining the broadcast fray.

Perhaps the best way to assess Netflix’s market share gains is its subscriber base. In its most recent quarter, Netflix counted 73.4 million paying members in North America, or just over half of the total number of households (about 140 million).

This number has grown steadily over the history of Netflix streaming. Ten years ago, only 28 million households in North America paid for Netflix.

Meanwhile, the number of subscribers to pay TV channels, including cable, satellite and telecom, has fallen to 77 million from more than 100 million a decade ago.

Netflix’s victory over the traditional cable package is a big reason for the company’s success.

3. Tesla’s disorder in electric cars

Tesla (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 steep odds to achieve Mainstream electric cars in the United States

While the company’s biggest accomplishments may have to do with engineering, one reason for the stock’s success is that it’s quickly gained market share in a huge market — cars — making it clear along the way that electric vehicles are the vehicles of the future.

Just as Amazon has grown over time by gradually taking market share from traditional retailers, so has Tesla with automakers. As the chart below shows, Tesla’s revenue has grown rapidly in a large and mature industry.

TSLA Revenue Chart (YoY Growth)

TSLA Revenue (YoY Growth) data by YCharts

As you can see from the graph above, Tesla has been growing revenue in high double digits for most of the past eight years, while its domestic peers like stronghold And general motors It was stuck with low single-digit growth, or even negative growth on a number of years. Although Tesla’s revenue is still about half of the leading domestic automakers, it is profiting on it quickly and could become the largest automaker in the United States by revenue in just a few years.

When you are looking for ten packing machines, market share should not be the only factor you consider. You want to make sure you understand why the company is gaining market share, whether the gains are sustainable, and whether they have an economic moat. In addition, there must be a path to profitability. If the companies from which you are gaining market share are profitable, that is a good sign that the disruptor could be profitable.

It’s rare to find a stock that meets all of these conditions, but when you do, it can lead to life-changing returns.

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