Netflix (NASDAQ:NFLX), Carvana (NYSE:CVNA), and Peloton Interactive (NASDAQ:PTON) are each poised for huge growth over the next 10 years. Each company has a beloved consumer offering but remains in the early stages of its long-term growth opportunity. Here's why.
A lot of U.S.-based investors seem to think Netflix's growth story is largely played out because the service is already so popular in the U.S. But this mindset misses the streaming pioneer's extraordinary global growth potential over the next decade and longer.
Consider the 195 million paid streaming subscriptions the company had at the end of the third quarter. That sounds like a huge number, and it is, but the world is a big place. There are about 2 billion global households today, and that figure should grow over the long term. Over the next couple decades, it's likely that the majority of those 2-billion-plus households will have high-speed internet access available that's sufficient to stream Netflix.
While China accounts for a big portion of global households and Netflix doesn't compete there today, that doesn't necessarily have to be a permanent state of affairs. Co-CEO and Chief Content Officer Ted Sarandos recently stated his view that eventually China's "walls will come down," but probably not anytime soon.
If that's the case, it could be said that Netflix has captured less than 10% of its long-term household subscriber opportunity. Given its beautiful economic model of creating fixed-cost content that can be monetized to a massive number of subscribers, the company's long-term revenue growth should be extremely profitable.
Carvana, the largest online retailer of used cars in the U.S., has been on fire since its founding in 2014. It sold its first car in Atlanta that year and has grown to sell 222,309 cars to retail customers over the last 12 months. That blistering growth has propelled Carvana to becoming the No. 3 retailer of used cars in the U.S.
But the U.S. used-car market consists of 40 million transactions per year. That means Carvana's 222,319 cars sold -- enough for the No. 3 position -- is only about a 0.6% market share. That highlights how fragmented the used-car industry is; the largest player, CarMax, has only about a 1.8% market share and the top 100 have only about an 8.6% share, according to Automotive News.
To see where Carvana may be going over the long term, we have to understand why it's been growing and gaining market share so quickly since its founding. The company's approach has been to sell used cars entirely online and pool its inventory into one nationally available selection. Instead of building hundreds of used-car retail stores, Carvana simply opens a few more inspection and reconditioning centers, each of which can process about 50 million cars annually, and expands its logistics network.
Traditional used-car retailers have a high-variable-cost business model, which doesn't scale well. Carvana flipped the equation around by creating a high-fixed-cost, low-variable-cost model. That's what enables Carvana to sell its cars at a generally lower cost than traditional used-car retailers, and part of why it's been growing so fast. It's possible Carvana becomes the first company to meaningfully consolidate the used-car market in the U.S., which should mean its stock price run is just getting started.
Peloton has been one of the "work from home" darlings of the stock market because its business has benefited from the housebound culture we've had for most of this year. But painting Peloton with that broad brush overlooks the fact that its business was on fire long before COVID-19 came along.
Peloton has more than doubled its number of Connected Fitness subscribers for six straight years. Clearly, the company's been offering a compelling product and service for a long time.
Some investors worry that a successful vaccine that finally ends the COVID-19 pandemic will drive people back into public gyms and cause many to cancel their Peloton subscriptions. That seems unlikely because the Peloton user experience is so engaging. U.S. Bike owners gave the experience a 94 net promoter score, a rating well beyond the 70 level considered world-class.
Furthermore, the average Connected Fitness subscriber has been doing over 20 workouts per month lately. That's a very high level of engagement that suggests the behavior is here to stay. Interactive home fitness is simply a better mousetrap.
Peloton had only 1.3 million Connected Fitness subscriptions at the end of the fiscal first quarter and management's guidance calls for "2.17 million or more" by the end of its current fiscal year in June. To put that in context, there are about 180 million gym memberships globally and about 90 million in the four countries Peloton operates in today. Those memberships represent people willing to pay monthly for access to fitness.
But the most exciting thing about Peloton is the company is meaningfully expanding the market. In the year ending March 2019, 4 out of 5 buyers of Peloton Bikes were not previously in the market for home fitness equipment. In other words, people who never previously would have considered buying home fitness equipment are joining the Peloton ecosystem. Investors should be excited by what that means for the company's addressable market -- and the stock's prospects -- over the next decade.