Every investor wants market-crushing returns, but they're not always easy to find.
Looking back at the stock market in recent past may offer some clues for the next ten-bagger stock. During that time, no group of stocks has captured the market's imagination and generated blockbuster returns like Amazon.com (AMZN -1.45%), Netflix (NFLX -2.28%), and Tesla Motors (TSLA -2.95%).
The chart below shows how the three stocks have done since Tesla's IPO in 2010.
As you can see, all three stocks have crushed the S&P 500 during that time. But the chart only tells half the story for Amazon and Netflix. Netflix has returned nearly 15,000% since its 2002 IPO, while Amazon has been the best stock to own over the last generation, growing more than 50,000% since its 1997 IPO.
Above all, three factors have contributed to these stocks' success, and they are what separate them from the rest of the market.
1. Visionary leaders
Jeff Bezos, Reed Hastings, and Elon Musk are all revered by investors, and deservedly so. The three, all of whom founded their companies, have reshaped their respective industries in a way that almost no other business leaders have during the last generation.
At Amazon, Bezos continues to push the e-commerce giant into new industries and market sectors. It seems like every week there's news of Amazon's incursions shaking up potential competitors. From its start as an online bookseller, the company has broken into e-books and e-readers, tablets, cloud computing, video streaming, voice-activated technology, and, most importantly, pushed e-commerce relentlessly with ideas like Prime, which have given it a huge advantage in online retail. Amazon's success has made Bezos one of the richest people in the world, and even Warren Buffett hailed him as a "genius."
Elon Musk made billions as co-founder of Paypal, and brought his reputation for tech disruption with him to Tesla. Investors haven't been disappointed. In addition to Tesla, Musk also started SpaceX and Solar City, and he regularly spouts out ideas like the HyperLoop or colonizing mars that would sound crazy if they were coming from anyone else. Musk has built Tesla into a coveted electric car brand, doing something no one else has in the century that idea's existed: executing nearly flawlessly on his strategy of moving closer to the mass market with each new model. In the meantime, he's also created a powerful battery business that could eventually be Tesla's real profit center.
Hastings may not get as much fanfare as the other two on the list, but Netflix has disrupted the entertainment business several times over now. First, his idea to ship DVDs by mail eventually brought Blockbuster and the rest of the video-rental business to its knees. Netflix's transition to video streaming was rocky at times, but it has become the industry standard, spawning copycats like Amazon, Hulu, and others. Finally, the company's entry into original TV and movies was greeted with skepticism at first, but Netflix scored nearly 100 Emmy nominations this year, and its studio is churning out dozens of TV series in addition to movies and other types of programming, becoming a powerhouse in Hollywood.
2. Huge addressable market
All three of these stocks have generated huge returns in part because the companies have broken into giant industries.
Amazon has continuously expanded its addressable market by entering new businesses, but the potential of e-commerce alone is enormous. After all, e-commerce in the U.S. continues to grow by about 15% per year, and Wal-Mart, Amazon's chief rival, brings in more revenue than any other company in the world. Throw in Amazon's other businesses like cloud computing and video streaming and it's beginning to look like the company's ambition is to serve all needs for all people.
Global auto sales are expected to reach nearly 100 million this year, and in the U.S. alone sales will top more than $1 trillion. Tesla has just begun to scrape that market, and, thanks to surging demand, investors have gone crazy for the stock. The company has taken more than 400,000 orders for its Model 3, and the opportunity in electric and autonomous vehicles is nearly endless. Similarly, the potential in batteries is sizable as well as much of the world converts to renewable energy.
Like autos, the market for video entertainment is almost immeasurable. Netflix viewers already watch a billion hours of content a week, and Hastings has observed that viewers spend over a billion hours a day watching YouTube. Netflix already has more than 100 million subscribers around the globe, and that number should at least double over the next decade as technology improves, the company invests in more content, and its brand recognition grows abroad.
3. Strong revenue growth
All three of these companies consistently put up strong revenue growth, bucking the conventional wisdom about the law of large numbers.
Notice in the chart above that all three stocks saw revenue accelerate last year, a particularly impressive feat for Amazon and Netflix, which many thought would have begun maturing by now. Revenue growth at Tesla, meanwhile, can be erratic due to the company's production cycles, but its sales have surged every year since its IPO.
That ability to put up consistently strong revenue growth shows the large and increasing demand for their products and services, and that these three companies are successfully penetrating the huge market opportunities described above. For all three, those factors ensure that revenue growth of 20% or better will almost definitely continue.
You may notice that two key features that investors often look for in a growth stock aren't included here.
The first is disruption. While market disruption is often discussed by investors as a crucial component in a winning growth stock, the potential for disruption is not enough. A lot of start-ups set out to be disruptive, but most are not successful. Recent IPO Blue Apron (APRN -6.27%), for example, was seen at one point as disruptive to the entire grocery industry. But the stock has flopped in its short time on the market as investors lose faith in the company. That's because a disruptive idea alone is not enough: It needs to be executed effectively, which is where visionary leadership comes into play.
All of these companies have faced competition from start-ups and incumbents along the way, but have bested them. One-time Tesla rival Fisker, for example, blew through $1.4 billion and filed for bankruptcy in 2013. EBay (EBAY -0.08%) had the early lead in e-commerce on Amazon, but never really innovated from its start as an auction house. Now Amazon has the much bigger marketplace. Blockbuster, meanwhile, copied Netflix's DVD-by-mail model, but it wasn't enough to fend off the insurgent
The other feature it's ok to ignore here is profits. None of these three companies is putting up consistent profits, but the market has essentially agreed that that doesn't matter. There are bigger things at stake here, like the taking over the retail, entertainment, and car industries. If that happens, profits will surely follow.
The combination of the three factors above have given these companies so much market power that investors don't really care about the bottom line. That may be the biggest lesson for investors hunting for the next Amazon, Tesla, or Netflix.