In this episode of Industry Focus: Tech, host Dylan Lewis and Motley Fool analyst Brian Feroldi bring their listeners a trio of potential 10-bagger stocks to put on their watch lists. They discuss the companies' business operations, management, their growth opportunities and competitors, why they expect them to succeed over the long term, and much more.
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This video was recorded on Aug. 14, 2020.
Dylan Lewis: It's Friday, Aug. 14, and we're talking about some of the best ways to spot big opportunities with investing. We're looking at 10X stocks; multibagger stocks. I'm your host, Dylan Lewis, and I'm joined by Fool.com's sultan supreme of substandard stock scrutiny -- there's no way that you put that in there, Brian, expecting that I was going to make it through that introduction. [laughs]
Brian Feroldi: I am very impressed, Dylan, because I don't even know if I could do it, and I wrote it. [laughs]
Lewis: It's always great when you can start a show out with a tongue twister, it really opens up the mouth and really gets things moving. [laughs] Despite what your title might say, Brian, you are someone who is actually quite a good investor and quite a good stock picker, and you find a lot of really good small names that wind up becoming much bigger names down the road. And that's really what we're looking for when we're investing, we want to see our capital grow because we are finding businesses that are increasing in their importance, in their relevance, and in their value.
And one way to think about that approach to investing is to be looking for multibagger or even 10-bagger stocks, and that's certainly something that we like to do here at The Motley Fool.
Feroldi: Yeah, it's always fun to hunt for these kinds of companies, right? All you need is a couple truly game-changing, home-run stocks in your portfolio to not only pay for your losers, but really carry your entire portfolio forward. And the term "10-bagger" dates back to famed mutual fund manager Peter Lynch. And he was constantly on the hunt for stocks that he thought could 10X in value. And, obviously, we like doing the same thing, Dylan.
Lewis: Yeah. And for folks that maybe are a little bit less familiar with this investing style, you can, kind of, equate it, in a way, to venture capital investing in the public markets. You are looking for those opportunities that are a little bit outsized, and perhaps maybe a little bit riskier, but the upside is just so attractive that you're willing to make a lot of small bets with the idea that one of those really pays off for you.
Feroldi: Yeah, that can be one investing strategy. And there's no right or wrong way to invest. Some investors are looking for low-volatility stocks that provide income and are value investments. Other investors are looking to swing for the fences and hit home runs, so we're definitely covering some more of the latter today.
Lewis: Yeah. And it's good to get that out in front there, because if you're a retiree looking for those stable income stocks, maybe not the show for you, but if you're looking for some interesting businesses that have the ability to multiply many times over, maybe you're someone with a little bit of a longer time horizon, we're going to throw out some names that are pretty interesting in that space.
But first, I think we should probably talk about what a 10-bagger stock might look like, and what exactly we're talking about when we're talking about multibaggers, in general.
Feroldi: So, the thing that I always look for when I think about a stock that can 10X in value, the first metric that comes to mind, for me, is always market cap, which is just the current size of the business. It's number of shares outstanding times the current share price. The reason I start there is, the larger a business becomes, the harder it is -- at least in theory, Dylan -- for that company to then go up 10X in value. So, just making a broad statement: It's much easier for a $300 million company to become a $3 billion company than it is for a $100 billion company to become a $1 trillion company.
Lewis: Yeah, and I think there are a couple of reasons for that, Brian, there's the simple math of, you know, if you are in a $100 billion company even, getting to $1 trillion is a lot more value [laughs] that you're creating. And there has to be a lot of things to back up that valuation. But also, chances are if you are going from a $500 million company to a $5 billion company, people are starting to notice the market that you're taking share of, and they're probably going to hop in and realize that there's money to be made there. And so, the larger you get as a business, the more other people realize, "Hey, you know that's a pretty attractive market they're in."
Feroldi: Exactly. So, when we came up with the idea for the show, I went through my watch list of stocks, even stocks that I own, and I said, what companies do I think could literally 10X their market cap and that valuation could make sense? So, when I was thinking through these, coming up with stocks that I think can 10X, I was looking for companies that were growing fast, were small- or mid-cap companies, growing their revenue in excess of 20% per year, and importantly, I believe that they can continue to do so for a long period of time. And they also, I think, need to have rapidly improving financials. I put that wording in there purposely, because they don't necessarily have to be profitable, because we've seen lots of companies go from unprofitable to profitable, and when that happens Wall Street can sometimes really reward that with huge share price appreciation. But usually, they are at least rapidly improving their net loss, if they have one. And then finally, Wall Street really needs to believe that the growth isn't going to end anytime soon. A lot of these companies that 10X enjoy generous valuation multiples, and to get to that 10X value at the end, Wall Street really has to believe that the growth will continue even after they've already grown for many years.
Lewis: I really like how you said "rapidly improving financials" there, Brian, because it is tempting to want a business to be profitable, and it is often not the best situation for a business to be in, particularly if they're in that high growth situation where, if you know that you're in a relatively nascent market and you can grow your top line 30%, 40% year over year relatively consistently for the next couple of quarters or years, and you can wind up grabbing a lot of those customers before other people wind up coming into that space, you should be funneling your money into marketing, you should be building out that customer base, especially if you're in a sticky product where once you get people in there, they're going to stick around. It would be misguided to focus on profitability.
That said, as a business gets bigger, you start to see the margin profile change a little bit. Hopefully, that moves in the right direction, possibly a debt-load lowering. Those are the types of things I would look at and say, "The financials are improving, even though they're not profitable." Those are still very good signs.
Feroldi: Yeah, and you just brought up a good point here. A common valuation metric that people use to judge companies is just the price-to-earnings ratio. And it's a great metric that we absolutely love at The Fool when you use it appropriately. But a lot of times, companies that are growing fast are reinvesting every dollar they can and then some back into their operations to grow, grow, grow, and to take market share and opportunity that they see. That's exactly what you should want to happen if you are a growth investor, but oftentimes that leads to bottom-line net losses or minuscule profits compared to what they could be. For companies like that, you really can't use the P/E ratio at all. It's basically a worthless metric.
Lewis: Yeah. And you can get some sense of that stuff with looking at price-to-sales, but the whole basis for comparison is totally different. What would be a totally normal price-to-earnings ratio would possibly be a high price-to-sales ratio. And frankly, you see a lot of high price-to-sales ratios in the tech space where we tend to focus, because we know, once these businesses become profitable, they choose to become profitable because they're so high margin, they're so scalable, they often command those higher multiples.
Feroldi: Exactly. And you know, I know we're going to talk about Amazon in a little bit as a company that has 10Xed over the last decade. One of the big knocks that a lot of investors have had against Amazon is, where's the profits? I don't see any profits. The price-to-earnings ratio is negative or in the hundreds or thousands. That is a classic, great example of a company that purposely reinvested like crazy to drive growth. And that led to huge shareholder returns. But again, on Amazon, the P/E ratio at any time over the past decade would've been a worthless metric.
Lewis: And just to spend one more second on that, Brian. I mean, if you are deciding that you don't have other places to put the money as expenses and you wind up showing that money as net income, you're paying taxes on that money. And so, if you have better places to funnel it, because you have an internal rate of return with the dollars that you're putting out there, that is 20%, 30%, why wouldn't you do it? If you can minimize the tax load -- we talk about tax efficiency all the time from an investing standpoint, right. Not selling, not incurring short-term capital gains. The less you sell, the less taxes you have to pay. Companies often think about it exactly the same way.
Feroldi: Exactly. It's almost like Amazon made its business into like a 401(k) for the last [laughs] 20 years, and then at the end, it's basically now it's starting to show profits again and it's now, as you pointed out, its tax bill is skyrocketing.
Lewis: For my own purposes, I put together what is more a statement of a 10-bagger's characteristics rather than the checklist approach, and it doesn't surprise me at all that you went checklist with this, Brian, because that is very much your investing approach. And some of our listeners know that you have an awesome methodology for looking at companies.
The easiest way I can sum up something that looks like a 10-bagger is, market-leading position in a growing industry that still has a lot of growth in front of it, and they probably still have a lot of market share to gobble up. I think if you can check those boxes, you wind up on the path to maybe not a 10-bagger, but probably a multibagger. And maybe that's an important thing for us to point out here, Brian, is, if you're aiming for a 10-bagger and you get an eight-bagger, that's fine too. [laughs]
Feroldi: Yeah, that's not a bad outcome. And I would say, the only caveat I would throw in there is, yes, I think you are 100% correct there, but this is yet another reason why I heart recurring revenue, Dylan, because if you have recurring revenue and you're growing into a massive opportunity, you are building off a bigger and bigger and bigger base. If your revenue is one-time in nature, you're on a treadmill and you have to outdo yourself every year that passes, and it becomes exponentially harder as you grow. So, yet another reason why we stress recurring revenue, recurring revenue, recurring revenue.
Lewis: We want sales to be easy, right, we don't want to have to go to deep discounts to bring in new customers every single time, we want those customers to stick around and keep paying us.
Brian, with all that preamble out of the way, let's talk stocks. I mean, that's what people are here for, they want to know companies that can 10X. You've got two; I've got one. And then we'll do a little debrief.
What's your first business?
Feroldi: Okay. And obviously, we're going to throw out that there's a lot of caveats, these are not official picks, but hey, these are companies that I think can 10X in value. So, the first one, I'll throw out there is a spicy little software company called Red Violet (RDVT 6.00%). This is a company with about a $200 million or so market cap. It was spun off into the public markets in 2018 and it's already up over 200% since then. Dylan, have you ever heard of Red Violet before?
Lewis: [laughs] No, I haven't.
Feroldi: Okay. Perfect. That's how I like it.
Lewis: [laughs] This is great. I'm going to play the audience for this episode, because I love it when you bring a name to me. And I'm like, all right, tell me all about it. [laughs]
Feroldi: Okay. So, Red Violet is a software company that is focused on big data analytics. So, they go out and they purchase huge pools of data from a wide variety of sources, mostly from public sources. They say they have nine petabytes of raw data -- that's a lot. And they developed this custom software engine that allows their customers to take that massive data set and provide intelligence and make sense of it.
Now, Red Violet has two main products that they've rolled out and they have said that they have more in development, more on the way. I like that; that tells me optionality is already embedded in this company. The first one is called IDI, and it is mainly aimed at the risk management and fraud detection agency. So, they take, again, this massive amount of data and they sell the service to companies like insurance companies, private investigators, bail bondsmen, collections agencies, debt buyers. Those customers want information on their customers. And IDI helps them to track down customers, get contact information for them, and to recover debts and prevent fraud. So, it's not exactly a business that you are screaming in love with if you're a Big Brother fan, but that's the business. And they have attracted more than 5,000 customers so far. And we're going to get into the financials in a little bit, but as you can imagine, it's a software company, so the margins are pretty good, Dylan.
Lewis: Yeah, I think that's a staple [laughs] at this point, of the Tech show -- software company, high margins, let's go. And I think just to quickly emphasize the trend that this is really hitting on is analytics and big data. That's the tailwind for this business.
Feroldi: That's correct. And that's a massive market that is only going to grow in importance over time. So, OK, so that's their IDI business. Their second one is called Forewarn. And this, again, leverages their massive pool of information. And this product Forewarn is specifically designed for the real estate industry. And the way they sell it is, imagine that you are a realtor, you have a house on the market. You get a phone call from a prospect and says, "Hi, I'm interested in this property, will you come show it to me." You are the Realtor, you have no idea who's on the other end of the phone, you know nothing about them. All you have is a phone number. This product Forewarn allows you to take that phone number and get a criminal background history on that person, and to see if they have any bankruptcies. And basically, it'll let you know more about the customer, the potential customer, that you are about to go to a private location and meet with them with nobody else around. So, they have signed up over 40,000 real estate agents in just the last two years since this product launched, because again, it provides Realtors with a way to manage their risk and prevent some bad things from happening when you're meeting with people that you've never met before face to face.
Lewis: [laughs] You know, it's funny you mentioned the fear of Big Brother, and it might not be an appealing company for folks that are maybe in that world. I'm reading 1984 right now, Brian. [laughs] And it is definitely sounding that alarm a little bit for me. What do the books look like for this business?
Feroldi: Yeah. And again, just as you said, Dylan, I understand why this company's core business, it's going to turn off a lot of people. And that is completely fair if you want to take a pass, but the financials on this business are definitely rapidly improving. So, in 2017, the company did $9 million in total sales. Again, not much, small company. In 2019, that number jumped to $30 million in sales. So, that's more than a quadrupling in two years.
What really attracted me to this business was the margin profile, Dylan. So, again, they spend a huge amount of money to get these petabytes of information and then they sell it. And because their costs are largely fixed, the margins are just exploding at this company, because every additional sale they make is basically 100% gross margin. So, their gross margin was 18% in 2017 and that jumped to 59% in 2019. Management thinks that with scale and time, they can get this above 80% within the next couple of years. So, that is causing gross profit to really expand.
If you look at the first half of 2020, revenue has grown, but kind of a hard environment to sell any products. So, in the last quarter, their revenue did drop 3% when compared to the previous period. Management did say that they are seeing rapidly improving growth since bottoming out in April. But, again, even though this company has very little sales, they were free cash flow positive over the last six months.
On a net income basis, they're still showing losses but they are producing free cash flow of $1.8 million just last quarter. And the balance sheet here is squeaky clean -- $14 million in cash, $0 debt. And the company believes that its total addressable market opportunity today exceeds $10 billion. How much of that will it capture? I don't know, but there's probably a lot of room between $30 million and $10 billion for this company to grow.
Lewis: Yeah. I mean, that's the beauty of being in this smaller space, these smaller market caps, you know, you don't need a $400 billion market opportunity. [laughs] You can be a lot smaller and you can still wind up putting up some pretty incredible returns.
Brian, when you look at this company, obviously, not everything can be great. What are some of the risks that you see? We're looking at a smaller business, so I think just off the bat we're looking at a different set of considerations here, but what else comes to mind?
Feroldi: Yeah. So, this was a spin off, that has some concerns. And again, the market that they're in, they face some pretty big competition. We're talking about Palantir, which is a multibillion-dollar company that is about to come public; LexisNexis; they're competing against TransUnion and Thomson Reuters. So, it's not like they have this market all to themselves. I think that the market is big enough that there can be multiple winners, and they seem to have developed some niches for themselves that they can kind of own and really dominate in specific use cases. But you can't ignore the competition here.
Two other risks that I saw were concentration risks. So, they get 40% of their data, that again, they resell, comes from one source. So if they ever had a bad relationship [laughs] with that one data provider, that could really hinder their selling proposition to customers. And then on the customer side, one customer accounted for 15% of revenue. That's actually not that bad, given how small this company is, if they only had one customer that represented some concentration risk. But those are definitely two risks to keep in mind.
One other that I'll throw out there is that two of the major shareholders of this company, Phil Frost and Michael Brauser, don't exactly have perfect reputations with Wall Street. They've been accused in the past of dealing with pump-and-dump schemes. And those two shareholders have 22% and 17% of this company. So, that is something to keep in mind here.
Lewis: I think that that's an important point, Brian. Because when we think about really big businesses, those are huge ships to steer. You know, if you're a MasterCard or an Amazon, those are very big businesses, and leadership matters. It's obviously super-important. Amazon wouldn't be Amazon without Jeff Bezos. But I think as you get into smaller and smaller companies, management matters a lot more, because their reach and their ability to transform a business or burn it to the ground is amplified because they have so much more reach in the operations of that company.
Feroldi: Yeah, and that's completely fair. So far, from what I've seen out of this company, I haven't seen anything nefarious yet, but that's definitely a risk for investors to keep in mind. Derek Dubner is the CEO and the chairman of the board here. He has been since the company was split in 2017, and he actually has a history of making successful exits with businesses exactly like this. He has taken two to get bought out for more than $1 billion combined. And if you listen to him, he thinks that this is his most exciting opportunity yet.
But to your point here, Dylan, I don't think that the backing of this company is bulletproof by any sense. So, I have taken a position in the company myself with a tiny part of my portfolio, because I think the business is actually really attractive, but you have to go in eyes wide open if you're going to get to this company.
Lewis: Yeah. And to be clear, I wasn't saying that as an indictment of current leadership, I was more speaking just broadly about investing in smaller businesses, the management team matters more, and so it's worth paying attention to anything that you can glean about management, just because they're going to have a little bit more influence over the direction of the company. Not trying to throw anybody under the bus here.
Brian, your second stock is another company that I admittedly didn't know before you threw it onto our prep sheet. So, I'm excited to hear about this one too. Endava (DAVA 1.02%), walk me through this one?
Feroldi: Awesome! Glad to hear that [laughs] I am 2-2 with getting companies that you've never heard of. So, Endava is a much bigger company -- it's a $3 billion market cap. And this is another recent newcomer to the public markets. And it's up over 170% since its 2018 IPO. We both know that winners keep on winning, and I love to see when companies have really had a great debut since they came public.
So, Endava is a consulting company that focuses on IT. They help big companies to develop digital strategies and make the most out of mobile, the Internet of Things, cloud, automation. The simplest way to visualize this company is they are like Accenture, but smaller, and hyper-focused on just tech.
Lewis: Yeah. And actually, I remember I had a conversation with John Rotonti a couple years ago and he was saying, if you want to blindly bet on technology, the advancement of technology, the fact that it's going to be changing, and there are going to be disruptions, Accenture and consulting businesses are a great place to put cash, because they will be there no matter what the implementation is, no matter what the strategy is. Clients will be paying them to be able to help bring them into the digital age, whatever that might look like.
Feroldi: Yeah. I think that that's a great statement, because if you look at four of the biggest publicly traded tech consultants out there, -- and this is one of them -- they have all been fantastic investments. And we'll get into why. So, Endava is mostly focused in the U.K. It's actually a U.K. company, And about half of its revenue comes from the U.K. market, about a quarter of it comes from Europe, and the remainder comes from North America. So, North America is actually this company's smallest segment. But I like that they're focused in the U.K. and Europe, because that does provide some diversification and some geographic distribution when compared to companies like Accenture or say, Globant or EPAM. But very similar business models to those other two. They provide a full suite of tech services.
And they have attracted almost 400 total clients, 67 of which pay them more than $1 million. And the nice thing about the IT consulting business is, not only are there always new things to talk about, to train on, to consult on, but there are recurring revenue relationships that you get, and they're very sticky. Once a company signs on with a tech consultant, they tend to stick around for years on end. And that, again, provides companies like Endava with a base that they can build off of as they land new clients and grow. And that explains why this company's revenue growth has been so strong.
So, in 2016, the company was doing about $169 million in revenue; last year, $373 million. So, that's a compound annual growth rate over 30%. COVID has definitely slowed down their growth rate, but longer term, management believes that they can re-accelerate growth back up into the high 20s percentages. And these businesses are also very scalable, so they enjoy stable gross margins, not super-high software margins, Dylan, but stable. And they have produced profits and free cash flow the entire way.
So, when I look at a company like Accenture, I see a market cap that is, again, $150 billion; Endava $3 billion, that's a lot of room between the two.
Lewis: Yeah, plenty of room to run there. It's a proven model, that CAGR is hard to come by. You know, it doesn't matter what sector you're looking at, seeing a three-year CAGR of over 30% is pretty darn impressive.
Feroldi: Yes, it is. And again, as John alluded to, the market for these services is just massive. The estimates that I see are $450 billion, IT consulting market today, that's expected to almost double just within the next five years. So, this is a market that is so big and the need is so huge that there are going to be multiple winners. And so many of these consulting companies have been winners for investors.
Lewis: Yeah. And maybe if you're on the client side of this, this is for the worst, but if you are on the [laughs] consulting side of it, it's for the better. The goalposts are almost always moving with tech. And so, Brian, how many different software solutions have we talked about addressing major enterprise issues over the last four years? There's always something different sprouting up, and it's very easy for these companies to stay in business and to grow their business, because the space is just changing so quickly.
Feroldi: Exactly. Another thing I like about Endava, in particular, it's still run by its founder, his name is John Cotterell. He, himself was an IT consultant, saw the opportunity, wanted to strike out on his own. He built this business from the ground up. He makes occasional acquisitions. And he still owns 19% of shares outstanding. He gets glowing reviews on sites like Glassdoor. So, clearly, the kind of founder-CEO that we want to see.
Now, with all that in mind, I think the opportunity here is huge, [but] it's important to remember they are facing off against the likes of Accenture, Bain, McKinsey, EPAM, Globant and hundreds of other small consultants. I mean, that's always been the case, and they consistently win their fair share of new business, but that is a risk to keep in mind.
Lewis: Yeah, those are some big businesses. You know, that $3 billion and, what was it, $150 billion, Accenture's market cap? That's not big brother/little brother, that's like [laughs] grandfather/little brother in terms of size. But, yeah, I mean if they can keep those growth rates going, there's compelling business there.
Feroldi: Uh-huh. And I don't see a lot of concentration risk either, given their size. They do have 67 customers that are responsible for more than $1 million [apiece] in revenue, but their top 10 clients only accounted for 36% of revenue. And that number has steadily decreased over time as the business continues to grow and diversify. So, I don't see a tremendous amount of risk here other than potentially overpaying, and the company's market share gradually diminishing.
Lewis: All right, Brian, our first company was sub-$500 million, our first one was in the billions. I'm going to throw out something, kind of, in the middle here as our third stock. And this is probably one that some Fools are familiar with, certainly going to be familiar with the space, they operate in a very similar space to a Fool favorite, The Trade Desk, and that is, Magnite (MGNI 3.42%), formerly Rubicon, formerly Telaria. This is like the Prince of stocks, it just goes [laughs] through different names every couple of months, which I think is a risk we can talk about a little bit down the road.
But really, the story with this company is, we have seen a massive pivot to digital ad spend over the past decade. And I think in 2019, it finally eclipsed traditional ad spend, and it is expected to continue to climb while the traditional ad market more or less stagnates. And I think overall, digital is expected to grow somewhere in the neighborhood of 17% to 13% CAGR year over year for the next couple of years. Magnite plays in a very small portion of that space. They're in connected TV. And so, you know, if you are watching something on Hulu and you get an ad thrown up in between your segments, that's kind of what we're talking about here. And anyone that follows The Trade Desk is going to know the space. You get ads into slots. Magnite and The Trade Desk operate on different sides of these transactions and of these markets. Magnite is on the sell side, which is the publisher side; and The Trade Desk is on the buy side.
And I think one of the reasons that I'm very interested in this business is, over the last five to 10 years, digital ads have been a great place to invest. It's been a huge moneymaker, it's high margin, and that's where advertisers want to put their money. They're seeing more effective ads, they're getting better ROI on their spend, they're getting increased analytics, and all of those lead to better outcomes for their ad budgets. And we've seen this model play out pretty successfully with The Trade Desk. I think that that's a safe statement there, right, Brian? [laughs] I think The Trade Desk is already a 10-bagger at this point. Magnite has a lot to do to catch up. And they operate in slightly different businesses, they have slightly different financials. The margins are better for The Trade Desk right now, the revenue is higher, the growth looks better. But I see a very proven model and I see an industry trend going in a very specific direction. And the company expects the core market, connected TV, to grow at a CAGR of 22% for the next few years, reaching over $50 billion.
I like it, because it's a sub-$1 billion company. I think their market cap is currently around $850 million. And we see a proven success track record in this market already with The Trade Desk.
Now, I mentioned before, Brian, [laughs] that there are several different ways to know this business, and I think that that is probably the largest risk to it right now. It has gone through a huge transformation, it's gone through a merger, it's going through a rebranding. There are all these different things that pose potential issues. And if you look at their financials, they're a wreck [laughs] for the last couple of years because of all these pivots. I don't like to see a lot of major corporate changes in a very short period of time, but for a business like this, it's small enough that there is huge return potential if they're able to capture that sell side of the market, and they seem to be the leader, especially on the sell side.
Feroldi: Yeah, I've heard about this company numerous times. Lots of Fools really liked this company a lot previously when it was Telaria, and then they merged with the Rubicon Project, and then they changed their name again, as you point out, to Magnite. So, yeah, I agree with you, there is a lot of potential for this company.
When I was looking at it previously, the thing that I noted was, the merger that Telaria did with the Rubicon Project was pretty sizable given the relative scale of the two businesses. And when I see that, I always like to put the onus on the companies to be like, all right, prove that you can do this, prove that you can get to the other side and realize all the synergies and benefits that you can. I think if they can, the upside potential here is huge. And to your point, I think they're playing in a big market.
So, the company, to me, definitely has 10X potential; I'm still in a wait-and-see to see if they can actually execute like they're planning on.
Lewis: I think that's fair. That transaction was really done with the goal of creating one integrated, independent sell-side advertising platform; like, that was the goal. The Rubicon Project was a little more focused on the programmatic side of advertising. Telaria was focused on the connected TV market. Put them together, and you have a really compelling idea. I kind of liken this business to a company that was on the licensing model of software sales and is moving over to software-as-a-service, and is going through that transition of selling the disks almost, you know, to getting people on a recurring-revenue model.
Brian, we've talked about this plenty before, but it's wildly disruptive to a business to go through that type of transformational change. You wind up far better on the other side of it than you were originally, but you have to eat some pain during the middle. I think that that's kind of where this company is. And given the number of things that have to go right, it's a small allocation for me, I own very little of it, but when we're talking about these 10-bagger potential stocks, the idea is that you don't have to own a lot of it.
Feroldi: That's exactly right. One of my favorite Fools of all time, Tom Engle, always says about great growth stocks or stocks with these kinds of potential, if this company is the next great growth stock, a little is all I need; if it's not, a little is all I want. That's exactly my approach to these companies. You just need to devote a little bit of your portfolio to them, knowing full well that they might not work out, they just might blow up in your face. If you only do a little bit, that's fine. But even that little bit, if it does 10X, that can become a portfolio mover for you.
Lewis: So, our three stocks that we were talking about here as 10Xer, we have Red Violet, ticker RDVT; we have Endava, ticker DAVA; and we have Magnite, and that ticker is MGNI.
And we were primarily focused on smaller businesses here, Brian. You know, two of our picks were sub-$1 billion, one of them was $3 billion. Those are all relatively small companies, you know, in the grand scheme of the companies that we talk about often. I think it's worth highlighting, though, there are big companies that can give you that 10-bagger return. It's not impossible, it's just a lot harder because the denominator is so much bigger. And so, just to look back at the past decade -- Amazon, Netflix, Salesforce, MasterCard, Tesla, Nvidia, all 10-baggers, giving investors over a 26% annualized rate of return, pretty impressive.
Feroldi: Completely. I mean, those companies have been monster winners. And, yes, to your point, I don't think you exclusively have to look at small caps and mid caps to get 10-bagger returns, although I'm looking at the market caps of those companies, Dylan, right now 10 years ago, and I see $5 billion, $13 billion and $26 billion, so. In Amazon's case, Amazon was $50 billion, and it has what, 30Xed since there; I mean, just insane.
So, yeah, you can look at companies that are even as high as $50 billion and still get 10X return on them, which is just crazy to think about. But overall, I think if you are hunting for 10Xers, you'll find more when they're sub-$10 billion than you will when they're over $50 billion.
Lewis: Just out of curiosity, Brian. I didn't ask you to prep an answer to this, so if you don't have one, it's OK. Is there a company that is more in the $10 billion to $20 billion range that you see now, and you're like, you know, I could see it, I could see it being in that 10-bagger conversation? And maybe you could do some rounding and it could be an eight-bagger, and we'll say, over, like, the next decade or so, a business that might belong in that combo.
Feroldi: Wow! Really putting me on the spot. And since you did so, I'll say, Etsy. Etsy is a $15 billion company. Given its domination and what we've seen happen with e-commerce in general, I could see Etsy being a $150 billion business one day, especially if it continues to roll up smaller niche markets and really become the standard for non-Amazon e-commerce, it's possible.
Lewis: I'm sure a lot of Fools would like to see that; that's a heavily followed Fool stock right there. I think, on my end, since I put you on the spot, I will put myself on the spot as well. I think Slack could be one of those businesses. We've seen enterprise software companies really take off. They're a $16 billion business. So, I think it would be kind of hard, but they seem to be in there and they seem to be offering something that is uniquely different from what people are using Microsoft Services for right now on the enterprise side. TBD on that, but [laughs] and I reserve the right to be wrong, to quote Tom Gardner, but I think that that's a small enough, big enough company where there's enough opportunity there that it might fall short of that 10-bag, but it could provide some pretty good returns along the way.
Feroldi: I'm going to be really mad if it only nine-bags for me, Dylan. [laughs]
Lewis: [laughs] See that's the thing, shoot for the moon, even if you miss you wind up among the eight-bagger stars. Brian, thank you so much for hopping on this episode with me.
Feroldi: Great to be back, Dylan.
Lewis: [laughs] Listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say, "Hey!" shoot us an email over at [email protected], or tweet us @MFIndustryFocus.
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