Over the past 15 years, the S&P 500 has risen in price by nearly 232% (2x performance), which works out to about a 9.8% compound annual growth rate (not adjusting for inflation). It's a solid benchmark for stocks to be measured against. But there are two stocks currently trading that have what it takes to crush that average over the next 13 years or so.
Tech start-ups DigitalOcean (DOCN 0.80%) and Confluent (CFLT 4.31%) are both showing incredible promise as companies and as stocks, growing immensely in their respective industries. The two stocks, in particular, show real potential to crush the market over the next 15 years. Let's take a closer look at these two potentially strong performers.
Image source: Getty Images.
1. DigitalOcean: A growing SMB choice
When small- and medium-sized businesses (SMBs) or independent developers are looking for a cloud services provider, more and more are realizing the top names in the industry don't cater well to their specific needs. That's where DigitalOcean comes in. Unlike Amazon's AWS or Microsoft's Azure, DigitalOcean focuses on the basics, providing simplicity and transparency to SMBs so they can start operating in the cloud. It does not want to expand its offering into every complex tool possible.
DigitalOcean has managed to obtain nearly 600,000 customers because of its ease of use, and it plans to add services strategically and slowly. The company doesn't need to use product expansion as a growth lever to succeed. The company estimates that its addressable market from small businesses alone could nearly triple to $116 billion by 2024. If the company can continue to provide a simple platform that is easy to use for amateur developers, it has enormous room to grow its business.
The main risk to DigitalOcean is competition. Not only does it face behemoths like AWS, but the larger services are beginning to provide smaller offerings specifically built for SMBs. The company is also up against smaller pure-plays like Vultr that are focused on SMBs with little development experience too.
DigitalOcean's advantage here is that it has established itself as a leader in this niche. This leadership position means that just under 19.5% of its gross profit so far in 2021 has gone toward sales and marketing. The company doesn't have to spend a lot to attract and expand relationships with customers. DigitalOcean is gaining brand recognition in this space to the point where it can spend little on marketing and instead focus on becoming profitable.
DigitalOcean lost $7.4 million in the first nine months of 2021 -- representing 4% of gross profit. This has improved substantially compared to the same period in 2020, where the company lost 24% of gross profit. While not profitable yet, the company will likely become profitable in the coming quarters as it continues attracting and expanding its relationships with SMBs because of its superior product and brand reputation.
The bottom line for DigitalOcean is this: If it can continue offering a simple, easy-to-understand cloud service to SMBs, it has the potential to completely dominate this niche, which will grow rapidly until 2024 and likely beyond.
2. Confluent: The market leader for real-time data
If you want to outsource the management of a part of your business, wouldn't you want that someone else to be the best? When it comes to analyzing data in real-time, over 3,000 customers have said "yes" to that question by employing Confluent to run their Kafka stream data analysis.
The open-source data analysis tool Apache Kafka was developed in 2011 to allow businesses to analyze data in real-time. Some companies cannot wait 24 hours to analyze the large amounts of data constantly streaming into their systems. They need to monitor their data for critical information in real-time. For example, a bank would need to notice a fraud is taking place immediately. Apache Kafka software allows them to do that.
The problem is that running Kafka is complex and difficult, and having someone that understands how to do that is worth paying for. So the same people who created Kafka -- which can be used by anyone for free -- decided to create Confluent to monetize their expertise in how to employ its services. It manages a company's Kafka stream, processing and analyzing their data in real-time for them. The company is the leader in this industry -- because who is better to run your Kafka stream than the actual creators of Kafka?
More than 80% of Fortune 500 companies use Kafka, so being the stand-alone leader in the space is a very lucrative position for Confluent. Despite Kafka's penetration among big businesses, Confluent is still in the early stages and sees its addressable market almost doubling by 2024, reaching $91 billion.
With this fast-growing opportunity ahead, the company has been rapidly spending in an attempt to gain widespread adoption. It is spending over 110% of its revenue on operating expenses, mainly marketing and development expenses. These investments to attract customers today and make its platform more appealing will pay off in the future via rapid revenue growth without as much heavy spending. Therefore, while the company's profitability looks bleak today, it will likely improve as it reaps the benefits of the investments it made.
With Kafka founders at the wheel, Confluent will likely maintain the large leadership position it has as the primary managed Kafka service. The investments in sales and marketing are already starting to pay off: The company saw Q3 revenue growth of 67% year over year to $107 million, and I expect this will only accelerate in the future. This is why I am confident that it could crush the market.
Growing in line with current market crushers?
DigitalOcean's addressable market is expected to nearly triple over the next three years while Confluent's is expected to double to $90 billion over the same time frame. There are plenty of examples of tech stocks out there that grew their revenue in line with their market growth and have been successful. Here are just a few examples of companies that have seen their stock price grow in line with their ability to capitalize on their expanding addressable markets:
Source: YCharts.
With DigitalOcean and Confluent's major competitive advantages and expanding addressable markets, I would expect that these companies to do something similar if they continue to grow at the rates they are growing today.
