As one of the first software-as-a-service (SAAS) companies, Salesforce.com started out as a humble supplier of one basic customer relationship management (CRM) software. That product is still its bread-and-butter, but the company has successfully added new software packages to its line-up, and grown by adding new customers and cross-selling its existing customers on new product offerings.
Salesforce went public as a small company with a large total addressable market. Last year, the company generated revenue of $9.4 billion, roughly 185 times more than it generated in 2003, due solely to its ability to grow its share of a highly attractive market.
Below, three fools lay the case for Caretrust REIT Inc (NASDAQ: CTRE), ServiceNow (NYSE: NOW), and Shopify (NYSE: SHOP) as companies that could generate incredible returns for investors due to their current size vs. their respective industries.
A huge trend makes this a stock to buy and hold
Jason Hall (Caretrust REIT Inc): While Salesforce.com has been a leader in the advent of cloud computing -- in its case, helping customers use the cloud to manage customer contact and relationship data -- Caretrust's path to growth will come from something old; or something that's getting old.
Okay, so forgiving the glib humor, the reality is, tens of millions of baby boomers are entering retirement age every year, and this is driving a doubling of America's 65-plus population over the next couple of decades. This megaexpansion in the older population is a huge demographic shift that's going to have major implications on both housing and healthcare, with a dearth of senior housing, skilled nursing, and rehab facilities to support the health and housing needs of this generation in future years.
And that's an excellent opportunity for Caretrust REIT, which owns skilled nursing, rehab, and senior housing facilities. Since being taken public in 2012, Caretrust has acquired 76 properties (a near-80% increase), and more than doubled its annual cash rent run rate. And with less than 175 properties owned at this writing, there's a major runway to grow, right along with America's aging population over the next 20 years.
As a real estate investment trust, paying out a substantial dividend that should grow right along with its size, Caretrust could make for one of the best stocks to own over the next decade-plus, just as Salesforce.com has been since going public.
Daniel Miller (ServiceNow): In 2002 Salesforce.com was already making a splash when it was named 2002 Product of the Year by Customer Inter@ction Solutions Magazine, the premier customer relationship management (CRM), call center and teleservices magazine. That was only a few short years after being founded in 1999, and long before it would become the largest pure-play software-as-a-service (SaaS) company in the world, and while many aspects of Salesforce.com are different than ServiceNow one similar competitive advantage will drive the latter's success in the future just as it did for the former: Switching costs.
ServiceNow's core market is Information Technology Service Management, or ITSM, but it has since branched out to include products for the IT Operations Management (ITOM), and gives ServiceNow the ability to upsell companies on an additional product. That's how Salesforce.com started its domination, as it branched out to more markets with different products. In fact, according to Morningstar.com, roughly 70% of ServiceNow's customers use two or more of the company's products and services, up from a meager 35% in mid-2014. As these products require significant training and are often extremely integrated within a company's IT infrastructure, changing products is a daunting task -- great news for ServiceNow.
Further, ServiceNow boasts some of the highest retention rates in SaaS, which will be critical for the firm going forward because as more competitors attempt to develop similar cloud based products, having a strong customer relationship will be important to its top and bottom line success -- and for investors to reap the rewards of a company boasting similar advantages to Salesforce.com all those years ago.
A royalty on e-commerce and small business sales
Jordan Wathen (Shopify): Shopify could make small business a very big business. The company hopes to be the go-to service provider for small businesses by offering an all-in-one product suite that helps small businesses process payments and operate their own online store for as little as $29 per month.
Shopify now powers more than 500,000 businesses in 175 countries with its platform, and it has only tapped a tiny sliver of the total addressable market. Shopify defines its market as the 46 million worldwide businesses with fewer than 500 employees. And as lofty as that market size may be, Shopify's 86% year-over-year increase in merchant solutions revenue suggests that the well is far from dry.
Shopify's business model and large addressable market make it a potential multi-bagger even after multiplying several times over since its IPO. But risks are numerous, as it isn't the only company that offers credit card processing or an easy-to-create online store, and its $10 billion valuation suggests that investors are already baking in a very bright future for the Canada-based company.
That said, we've set the bar high with Salesforce.com, a company that created riches for its early investors by turning its large addressable market in 2002 into a large addressed market by 2017. Shopify has a very long runway for growth, the only question is just how large of a slice it can carve for itself.
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Daniel Miller has no position in any of the stocks mentioned. Jason Hall owns shares of CareTrust REIT and Shopify. Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Shopify. The Motley Fool recommends Salesforce.com. The Motley Fool has a disclosure policy.