Since first debuting its "little red envelopes" in 1997, Netflix, Inc. pioneered the concept of streaming, which didn't exist a mere decade ago. The company has weathered competition and challenges, providing shareholders with returns exceeding 26,000%, including a whopping 66% so far this year. Finding companies like Netflix, which are disrupting an existing paradigm, have no real competition, or provide a groundbreaking product or service can be a surefire way to supercharge your returns.
With that in mind, we asked three Motley Fool investors to choose top companies that they believe could reward investors with returns akin to Netflix. They offered convincing arguments for U.S. Concrete, Inc. (NASDAQ: USCR), SolarEdge Technologies, Inc. (NASDAQ: SEDG), and Shopify Inc. (NYSE: SHOP).
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Fast-growing ready-mix concrete leader
Maxx Chatsko (U.S. Concrete): The recent surge in Netflix's share price set a high bar for any growth stock looking to take its crown, but U.S. Concrete stock (surprisingly) has held its own in the head-to-head matchup. The materials stock kept pace with the streaming leader's ascension in the span covering its re-emergence from bankruptcy in 2011 to late last year. Then the two started to diverge.
I wouldn't count U.S. Concrete down and out just yet, though. Management's growth strategy is pretty simple: focus on high-margin metropolitan areas and unite the fragmented ready-mix concrete market. And so far, it's worked.
The company delivered year-over-year revenue growth of 14% last year, boosting sales to $1.3 billion. While most sales are generated from the ready-mix concrete business, the nationwide market puts up $35 billion in annual revenue. However, there are an estimated 2,200 producers competing for business, which makes the ready-mix concrete market extremely fragmented.
In other words, there's an enormous opportunity for an aggressive company to consolidate the industry. U.S. Concrete has begun doing just that in four major metropolitan areas, including New York City, San Francisco, and Northern Texas, and made eight acquisitions in 2017.
That gives the company more market power and allows it to confidently bid on giant projects, from the construction of major corporate campuses to Freedom Tower. Big projects provide predictable business for years into the future, which smooths out volatility from the cyclical infrastructure markets. Simply put, U.S. Concrete is a good long-term bet for investors seeking growth and industry-specific leadership.
Competition is the bane of profits
Rich Smith (SolarEdge): Netflix stock is up more than 300 times in value over the last 15 years. How does a stock achieve such incredible returns? Well, not having any credible competition helps. Abortive attempts by Walmart to imitate its business model and "competition" from Blockbuster notwithstanding, Netflix has operated pretty free of direct competition for most of its history, first inventing the DVDs-by-mail concept in 1997 and then taking an early (and expanding) lead in video streaming over the internet.
So how do you find another company that could put Netflix's returns to shame? First, look for a company with no real competition.
Analysts at Vertical Group think they've found one. Last month, Vertical upgraded shares of solar-inverter maker SolarEdge to buy, and for a most intriguing reason (to Netflix fans, at least). As Vertical put it, for the time being, at least, SolarEdge's competition is "nowhere in sight." As a result, Vertical believes that SolarEdge can essentially "dictate" the price of its products "through 2018," commanding enormous profit margins.
Granted, if SolarEdge gets too greedy, high-profit margins are likely to attract competition and push profits back down. For the time being, though, I see SolarEdge selling at 21 times trailing free cash flow. It also is projected to grow profits 22% annually over the next five years. That looks like a bargain to me.
No threat from Amazon
Danny Vena (Shopify): When investors think of e-commerce, Amazon.com, Inc., the 800-pound gorilla in the room, undoubtedly comes to mind. The company captured an estimated 44% of all online sales in the U.S. last year, adding up to almost 4% of total domestic retail. With the company consuming most of the oxygen in the room, you might be tempted to think there wasn't air left for anyone else to breath.
Enter Shopify, an e-commerce platform that helps small- and medium-sized businesses establish and manage an online store. It provides more than 100 ready-to-use templates and 2,300 apps to help customize the shopping experience for the customers of each business.
The platform boasts more than 600,000 merchants in 175 countries that it counts as customers, with more than 1 million active users, who have sold more than $55 billion in products on Shopify. The easy-to-use system can also process credit card payments, manage shipping, and track orders.
Shopify once competed with Amazon's Webstore, but the e-commerce giant shut down the platform and named Shopify a preferred provider, recommending that those merchants migrate over to Shopify. Amazon vendors can now integrate their sales channels directly with their Shopify accounts.
The company has been able to successfully carve out an extremely lucrative niche for itself, even in an Amazon-centric world. Last year, Shopify generated revenue of $673 million, up 73% over 2016, and processed gross merchandise volume of $26.3 billion, an increase of 71% over the prior year. Gross profit grew 82%, to $380 million, though the company has yet to produce a net profit, which is the result of continuing investment in its business and focusing on growth.
Netflix produced stock price gains of 360% during its first few years as a public company before suffering its first major setback. Shopify has only been public since the second quarter of 2015, and since then the stock has grown 473% -- putting Netflix's early results to shame. I think it could continue.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon, Netflix, and Shopify. Maxx Chatsko has no position in any of the stocks mentioned. Rich Smith owns shares of SolarEdge Technologies. The Motley Fool owns shares of and recommends Amazon, Netflix, and Shopify. The Motley Fool has a disclosure policy.