Ever since the end of the financial crisis, growth has had a massive leg up over traditional value. There are a variety of reasons that explain the dominance of growth businesses over this time, which include interest rates that are at rock-bottom levels, the increasing role of technology in global economies and a shift in business model for technology businesses to a recurring, more predictable Software-as-a-Service model.
Much of the reason for the significant outperformance of growth and the indexes that proxy growth, specifically the Nasdaq 100 (QQQ) compared to the S&P 500 (SPY) and the Dow Jones Industrial Average (DIA), can be explained by the dominance of large-cap technology.
Source: YCharts comparison of Nasdaq 100, S&P 500 and DJIA
In late 2019, I suggested 10 stocks for the next 10 years, which actually featured several of these “FAAAM” names. In just 6 months, several of these businesses have gotten substantially larger. However, FAAAM will continue to grow because of massive end-markets that are also growing, including cloud computing, e-commerce and digital advertising. In the article “The Ways Investors Cheat Themselves Out of Long-Term Wealth Creators,” I suggested that one of the mistakes investors make is not assuming that large business can keep growing.
Yet, FAAAM’s rate of growth going forward will almost certainly be meaningfully reduced. All but Facebook weigh in over $1 trillion in market capitalization, and while their business models and dominant competitive advantages are as strong as they have ever been, increasing regulatory displeasure may bring an end to practices such as aggressive offer bundling (Microsoft Teams, anyone?) and company-transforming acquisitions like Facebook’s purchase of WhatsApp or Instagram and Alphabet’s purchase of YouTube.
These businesses have a disproportionately large weight in both the S&P 500 and the Nasdaq 100. FAAAM currently makes up almost 20% of the S&P 100 and nearly 45% of the Nasdaq 100. A slowdown in the rate of growth of these businesses will almost certainly impact these indexes and likely mean much lower returns than what we have seen in the last 10 years.
So, where should one go in search of the next set of high-growth businesses that could provide a similar effect on one’s portfolio over the next decade? It’s an issue that many growth investors are grappling with, and, in fact, a fellow contributor recently provided their take on this topic.
My own lens for evaluating 5 successors to grow aggressively over 10 years is to start with businesses that are solving meaningful problems in large markets where there are few alternatives that result in strongly satisfied customers and that are led by motivated and aligned founders or management teams.
While I considered excellent businesses such as MercadoLibre (MELI), Coupa Software (COUP) and Veeva Systems (VEEV), all of which I believe have strong and significant potential over the next decade, I ultimately went with a different set of 5 businesses, all of which are under $50 billion in market capitalization for long-term growth. I should say, with fair disclosure, that I am highly biased in my selection because I own all of these great businesses. I give you “AALTT” – the high-growth “AALTTernative” to QQQ for the next 10 years!
I recently highlighted Alteryx (AYX) as a major beneficiary of the data tsunami. If it’s not clear to you yet, it certainly will be over the next few years that data will be the engine that powers the economy. The rapid rate of digital transformation has created a massive amount of data already. However, that problem is only going to get worse in future years as a new wave of connected devices comes online and spews out reams of data which will contain nuggets of gold amidst a lot of noise.
However, for any of this data to be truly usable, it requires specialist data analysts to sort, prep and transform the data and derive insights from it. This process can be highly manual, extremely time consuming and may not yield very much.
Source: Alteryx 2020 report
This is where Alteryx comes in. It helps the humble data analyst shave massive amounts of time in data preparation, data processing and data analysis. This is a massive problem which constitutes a large market. The alternatives to Alteryx are either too simplistic (the humble spreadsheet) or custom and complex implementation of an analytics platform or other open source protocols that requires extensive coding.
Source: Alteryx 2020 report
Alteryx has massive amounts of customer love. Customers typically spend 140% more on the platform each year. As existing customers use the platform and experience delight, Alteryx then more deeply embeds itself into existing processes, making the platform more difficult to replace. Alteryx not only retains most of its customers, but these customers actually spend more with the business each year.
Source: YCharts, Alteryx revenue
Chairman and CEO Dean Stoecker, who co-founded the business in 1997, is still the driving force behind the company’s vision and direction, and continues to retain approximately 10% of equity within the company.
The problem of efficient workplace collaboration is a significant one, and it is even more acute in enterprise IT. Projects need to be tightly managed across multiple teams located in different time zones and different geographies. Features for specific releases need to be documented and assessed with issues and resolution detailed so projects can be delivered on time – something that’s even more critical with a remote workforce.
Atlassian (TEAM) helps businesses of all sizes ensure that IT projects are managed on time and on budget. If Alteryx is the intelligence that helps companies make sense of data, then Atlassian is the platform that helps businesses deliver the technology projects that help produce and manage that data.
At just under $50 billion in market capitalization, Atlassian is still one of those rather under-the-radar businesses that has little coverage and little fanfare. Yet, in the five years that I’ve owned it, the business has delivered a 7X return.
Atlassian has a massive addressable market of almost $60 billion with nearly 800 million potential software users. The company has used its foothold in providing project management software for IT teams to push steadily into call center issue tracking and HR project management.
Alternatives to Atlassian in the IT project management space are few and far between. While Asana has some play, Atlassian’s Jira product dominates the space, as can be seen by its rapid revenue growth rate which has averaged close to 40% annualized over the last few years, well above the growth of project management software market. Atlassian has a high level of customer love, with existing customers spending almost 40% more each year with the business.
Atlassian’s founding team continue to be strongly invested in the business. Founders Mike Cannon-Brookes and Scott Farquhar remain co-CEOs of the business today. Combined, both retain almost 50% of the equity in the business, providing them with significant skin in the game and alignment with shareholders.
The management of chronic health conditions is a significant pain point for both insurers and patients alike. Almost $50 billion is spent annually across the management of diabetes and hypertension. Patient compliance with the management of these conditions tends to be lax, between infrequent visits to healthcare professionals, causing the ultimate remediation of these conditions to be complex and expensive.
Source: Livongo 2020 report
This is where Livongo comes in. The company’s unique artificial intelligence-based platform ties in the management of connected devices, food logs and pharmacy claims data, amongst other things, to provide platform users with proactive prompts, directing them to take specific action to manage their condition when such management is required.
Source: Livongo 2020 report
What’s unique about this business and where Livongo gets its long-term competitive advantage is that the company is pursuing a platform-based implementation where it can treat large chronic conditions like diabetes and hypertension with the same type of approach. The business also removes traditional silos that have existed between data collection, data management and proactive intervention.
Livongo’s approach allows the closing of the loop between the data that is collected and the action that’s taken. This approach has met with positive validation from 30% of the Fortune 500 who are Livongo’s customers, as well as major pharmacy benefit managers such as CVS Health (CVS), Express Scripts (ESRX) and health plans such as Blue Cross Blue Shield.
Source: Livongo 2020 report
Livongo’s customer love can be seen in a strong and effusive user rating for its platform at 4.8 stars on the App Store.
Source: Apple App Store
Livongo’s founder, Glenn Tillman, still remains involved with the company as executive chairman and indirectly retains ownership of approximately 10% of the business.
I recently described Twilio (TWLO) as the operating system for the digital world. This isn’t a call that I make lightly. Enterprises of all forms have re-discovered the need to be digital first in an environment where their customers are increasingly having to interact with brands online rather than through any in-person interactions. Twilio plays an important role in this process.
Twilio provides a platform that exposes voice, text and video APIs that developers can take and integrate into their platforms to develop innovative applications experiences. Twilio helps developers create new digital experiences, while embedding the capabilities that help customers get assistance with live agents or people when it’s needed.
The role the Twilio plays makes it a toll taker for digital innovation. While there are other smaller players that provide communications APIs, Twilio provides the broadest geographical reach and the simplest experience to implement these tools. Customer love for the business is high, and Twilio supports a passionate and active developer community which is over 3M strong and customers who, on average, spend almost 40% more with the company every year.
Founder and CEO Jeff Lawson has been involved with the business since inception and currently has a stake in the business of almost 10%, providing him with significant skin in the game and good alignment with retail shareholders.
The Trade Desk
Digital advertising is a huge market, and it’s well-known that long-term trends continue to point to meaningful share away from traditional advertising towards digital.
Source: The Trade Desk 2020 report
Of course, Facebook and Alphabet are the two giants in the space and, between them, account for almost 60% of the digital ad market. The Trade Desk is my favorite to capture the remaining 40%.
The problem that The Trade Desk solves for agencies and brands is a significant one. There’s no denying that Alphabet and Facebook provide high return on investment to the brands that advertise with them. However, the nature of the ad campaigns that Facebook and Alphabet run lack transparency in how ad dollars flow and the cohorts and segments that were the most effective in providing this return to advertisers.
The Trade Desk makes use of a programmatic approach to digital advertising which uses sophisticated algorithms to provide advertisers with exposure to the cohorts they want, matching the inventory that’s available to facilitate campaign execution at the most effective price. In the process, the platform not only provides significant return on investment to agencies and their brands, but allows brands to know where their dollars are being deployed and what return they get from different properties.
Source: The Trade Desk 2020 report
The Trade Desk is uniquely positioned here as having the largest non-walled garden platform and the greatest aggregation of long-tail inventory, including emerging sources of inventory in connected TV, connected Audio, as well as Chinese digital inventory, providing brands with the highest likelihood of being the single platform to execute an advertising campaign in a single ad buy.
Jeff Green, CEO and founder, is an advertising insider and repeat entrepreneur with a very unique vision for what the digital advertising industry should be. The CEO’s interests are firmly aligned with those of retail shareholders, and Jeff has a 10% equity stake in the business.
While both the S&P 500 and Nasdaq 100 have performed exceptionally well over the last decade, much of that success is attributable to the five mega-cap tech names that make up 20% and 45% of these indexes respectively. To be clear, there’s no reason to think that these businesses won’t continue to perform reasonably well going forward.
However, given their large size and increasing regulatory scrutiny, it may pay investors to look at earlier-stage, faster-growing alternatives. Alteryx, Atlassian, Livongo Health, Twilio and The Trade Desk are names that should be considered in any such evaluation.
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Disclosure: I am/we are long GOOG, GOOGL, AMZN, FB, SPY, VEEV, COUP, MELI, TTD, TWLO, AYX, TEAM, LVGO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.