How To Find The Next Amazon Stock
You don’t see returns like that too often, and it’s inspired a flurry of “This Could Be The Next Amazon Stock” articles.
Rather than provide a specific stock and explain why it could be the next Amazon, I’m doing something different for this analysis.
I’m teaching you how to find and catch the fish rather than just giving one to you.
To find the next Amazon stock, you have to start by understanding what allowed Amazon to produce those types of returns since their IPO.
Amazon’s IPO took place in 1997, and after the dust settled on that day, Amazon had a $438 million market cap. This is important for finding the next Amazon.
The smaller a stock’s market cap, the greater potential that stock has to rapidly accelerate.
Amazon’s market cap is currently $1.58 Trillion which makes the original $438 million market cap a rounding error based on today’s standard.
The Fed can’t print enough money for Amazon to have another 180,000%+ rise. Amazon is still a great stock that has many growth opportunities in its own right, but the prospects of a stock doubling become more difficult as it grows.
For Amazon to double in value, it has to go from a $1.58 trillion company to a $3.16 trillion company. While it is possible, it’s far easier for a $1 billion company to turn into a $2 billion company.
Shopify, a stock commonly compared with Amazon, had a $1.27 billion market cap after its IPO. As of writing, Shopify’s market cap is now at around $120 billion. They’re rewarded their shareholders nicely, and I can see Shopify continuing to expand to greater heights in the future.
At $1.27 billion, it was easier for Shopify to continue multiplying and reward shareholders with 100X growth. For the same 100X growth to happen again, Shopify would have to has a market cap of $12 trillion.
While smaller companies have more potential for multiplying sheerly due to their size, that doesn’t mean you should go after every small company.
Some companies have small market caps because they’re on their way out of business. While anyone with hindsight would have bought Amazon shares in 1997, Amazon was still a small company at the time.
If you bought in 1997 and held, you would have also had to stomach Amazon’s stock price going from $105 in 1999 to barely over $5 in 2001 as part of the dot com bubble. It took Amazon more than a decade to reach $100 again.
Rather than heavily invest in companies with market caps under $1 billion just for the sake that it’s a small company, invest in small companies that have accelerating revenue.
It took a while for Amazon to figure out profitability, and they intentionally sabotaged their path to profitability because Jeff Bezos believes in spending all of the profit on massive growth opportunities.
As long as the revenue continues to grow and the losses minimize, there is potential for abnormal stock returns.
This is contradictory to the dividend investing approach as dividend investors like a solid balance sheet, a profit, and a focus on a company’s ability to pay and raise the dividend. However, most dividend companies are already mature, and their best growth days are behind them. If you want to find a stock that produces Amazon like returns, you almost certainly won’t find them in companies offering dividends.
You can find dividend stocks and high-cap stocks (i.e. stocks with market caps over $100B) that will beat the market, but it’s almost impossible for those types of stocks to 5X or 10X in a few years.
Mid and small cap stocks present the opportunity for those types of returns.
So far we’ve addressed market cap and revenue growth. But there’s one more thing we have to address…
Amazon was a very innovative concept. People can buy whatever they want from the comfort of their homes.
Innovative companies can receive massive widespread adoption if the innovation is designed to affect a large amount of people.
Catherine Wood, one of the most successful investors you probably haven’t heard of, primarily invests in innovative companies that buck existing trends. It’s no wonder ARK Invest has been a top performer that has consistently dominated the market.
She bought Amazon in 2002 and is now very bullish on Tesla. A company like Tesla may not make much sense if you only think about it as an automobile company. But if you view Tesla based on its other aspects (i.e. autonomous cars, AI, etc.) there is more meat on the bone than most people think.
When you combine a low market cap (preferably under $10B), accelerating revenue, more growth opportunities on the way, and an innovative concept, you have a company that can produce 10X even 100X returns depending on when you buy it.
Almost every investment with a 100X return gets bought at a time when people doubt the company or haven’t heard about it yet.
That’s why it is important to continue researching different stocks to find the ones that best fit the criteria.
Buying a stock with the potential to produce massive returns also comes with massive risk (i.e. Amazon going from $100 to $5 in two years), so do some research on any company before you invest.
Pay attention to growing trends and find companies that are capitalizing on those trends. And only buy these companies at a rate where you can stomach it for a decade. When you hold onto one of these companies for a decade, you’ll see the massive numbers.
If you get into the right company but leave too early, you end up leaving a lot of money on the table.
Relatively low market cap, growth, and innovative concept…from least important to most important.