In January 2008, Apple Inc. (AAPL 0.68%) had only released the iPhone about six months prior, and in the U.S. it was available only through a single cellular carrier. Even with its positive reception and early success, few people were expecting the iPhone -- or smartphones in general -- to become so enmeshed in our daily lives. And pretty much nobody was calling on this to become Apple's most important product and make it the most profitable and valuable company on Earth. The reality is, back then there was fear that Apple would lose out to competitors with more history in the mobile-phone business.
Can we find the next Apple? Obviously it's not that easy to spot the next industry-changing growth story. But that shouldn't stop investors from trying, so we asked three of our best to identify a company that could be in a similar situation to Apple in 2008: specifically, getting ready to experience a remarkable 10-year run that's driven by a big trend. They came up with e-commerce services leader Shopify Inc. (SHOP 1.43%), global streaming giant Netflix, Inc. (NFLX -1.74%), and Cisco Systems, Inc. (CSCO 0.19%), the longime network hardware leader that's making the pivot to high-demand, high-growth services.
Will any of these three stocks reward investors the way Apple has over the past decade? Read on to learn why our investors think they could.
A lot of Apple parallels
Jason Hall (Shopify): A decade ago, it hadn't even been a year since Apple had introduced the iPhone. And at the time, it was far from clear that this single device would come to dominate the space. Heck, back then many experts expected Apple to struggle breaking BlackBerry's "moat" with enterprise users. In hindsight, we know how that played out.
To some extent, Shopify is already having similar success. With major "competitors" like Amazon.com having moved on from their own in-house offerings and now integrating with Shopify's services for third-party merchants, Shopify has proved itself to be a major player in the transition to e-commerce. Yet even with its success so far, it's very early in the e-commerce story.
Over the next decade, most of retail's growth will happen online, and more of today's bricks-and-mortar shopping will have moved out of the stores and onto the Web. Shopify is a clear leader and innovator in this space, providing sellers the best suite of tools to make money online, without having to invest the time and resources it would take to build and manage a platform in-house.
Could Shopify deliver Apple-like returns over the next decade? Only time will tell. But if the company remains the innovator and leader in e-commerce solutions it has become, I think there's a good chance it does. Considering it's only about one-twelfth the size Apple was a decade ago and the market it operates in is multiples bigger, it could do even better.
A significant revenue "stream"
Danny Vena (Netflix): Very few companies can create the type of opportunity that Apple shareholders have enjoyed over the past 10 years. A groundbreaking product that dominated the competition, a revolutionary followup, repeat customers, and a worldwide opportunity turned Apple into the biggest company by market cap in the world.
While Netflix doesn't produce a tangible product, there are other striking parallels. Netflix's groundbreaking DVD-by-mail service drove the video-rental business to the edge of extinction, similar to the iPod's complete domination of its market. When Netflix pioneered streaming 10 years ago it was revolutionary, and it continues to attract repeat customers and possesses a massive worldwide opportunity.
Now, I'm not saying Netflix will ever be the world's largest company, but it has only begun to tap its global market, which now tops 100 million subscribers. Its worldwide total addressable market is estimated at 450 million, and international subscriber numbers recently exceeded domestic figures for the first time.
Several catalysts are likely to drive Netflix's future growth. In addition to greater international adoption and continued penetration in its global markets, Netflix enjoys pricing power, as evidenced by an increasing average revenue per user, and will benefit from customer inertia -- once people have signed up, most will remain customers because of the relatively low cost.
In its most recent quarter, Netflix grew revenue by 30% year over year, and its net income more than doubled over the prior-year quarter. The contribution margin in its U.S. market now exceeds 35%, compared with 4.7% for its international markets. Growth in this metric over time will lead to greater profitability.
Netflix has begun to see benefits from producing and owning its content, which it says has a lower per-subscriber cost than licensed programs. The powerful combination of an increasing subscriber base and lower per-customer costs will result in increased operating leverage and escalating margins.
For all these reasons, I think Netflix looks like Apple in 2008.
Make the right connection
Dan Caplinger (Cisco Systems): Even the best companies go through difficult periods, and just as Apple faced challenges in 2008, so too has Cisco Systems worked hard to rediscover its past dominance in internet networking. For years, Cisco allowed itself to fall behind, getting distracted by the possibilities of expanding in different directions and losing sight of the huge potential from naturally evolving its core business to take advantage of technological advances.
That all changed last year, when CEO Chuck Robbins made substantial progress in his transformation of Cisco's business. Like so many other technology companies, Cisco found that its hardware focus on network routers and infrastructure-support devices wasn't keeping up with the huge move away from in-house tech solutions toward cloud-based outsourced technology infrastructure. Now, Cisco has shifted toward high-growth areas that include infrastructure-as-a-service initiatives, the Internet of Things, and information security. After going through the usual speed bump in moving from a business model based on large one-time chunks of sales to a subscription-based recurring revenue business, Cisco has turned the corner, and investors now expect sales to keep on the upswing.
There's plenty of competition in the industry, and Cisco can't let up now. Yet if it keeps executing well, Cisco could make the same progress a decade from now that Apple has seen between 2008 and today.