Owning disruptive companies is one of the best ways to beat the market long term. Market beaters in the last two decades have come from e-commerce, electric vehicles, streaming, and more. But what businesses are set to be disrupted today?
The three companies that I think have disruptive potential are Spotify (SPOT -1.49%) in audio, Coinbase (COIN 2.01%) in Web3, and Virgin Galactic (SPCE 2.90%) in space tourism and travel.
Spotify
Most people know Spotify as a place where they listen to music, but the company's true disruption comes from podcasts. Podcasts have the potential to disrupt radio, news, and even other video apps.
Spotify starts with the idea of "owning your ears" with music, podcasts, and, most recently, audio books. Its initial business model involves charging a monthly fee to listen to music and collecting revenue from ads for members using the free ad-supported tier. However, Spotify's future aim is to be a platform for creators to build podcasts and monetize what they create, while owning the user experience as well.
To execute this strategy, the company has built and acquired creator tools like Anchor for podcasting. Once both creators and listeners are on the platform, the challenge is monetizing the business somehow.
Where Spotify could be building a very durable competitive advantage is in advertising. In the most recent quarter, ad revenue was up 24% from a year ago to $273 million, which is a small but quickly growing base. If Spotify can both target ads more effectively and increase spending on its platform, the business could be extremely disruptive.
YouTube showed that creators will build a business on a company's platform if they're given a way to monetize. Spotify could do what YouTube did, but for the ear, which is a market that's still in major need of disruption.
Coinbase
The last week has been chaotic for the crypto industry, with major exchange FTX filing for bankruptcy on Friday. That's a major blow for the industry, though possibly good for Coinbase, which is going to absorb some of FTX's customers. If the world is ever going to use cryptocurrency or the blockchain in a meaningful way, I think Coinbase will be key to the industry.
It's easy to see Coinbase as a company reliant on a volatile exchange business, but in the third quarter it generated $210.5 million from subscriptions and services (up 45% year over year) and $365.9 million in trading revenue (down 66% year over year). Services need to grow significantly to drive profitability, but with more institutions getting involved, security needs rising, and cloud-services demand growing, the company has a chance to take an important place in the market.
The disruption Coinbase brings is in abstracting away a lot of what the blockchain and crypto are today. I think the future isn't about people having their own wallets or convoluted sign-in pages for non-fungible token (NFT) holders; it'll look more like "Sign in with Coinbase" to see your digital assets. This would allow the company to be an identity, financial, and cloud solution for the next generation of internet companies. If Coinbase succeeds, it'll be a massive win for investors.
Virgin Galactic
If any company can make a trip to space attainable for the average person, it will be incredibly disruptive. Virgin Galactic is closer than any company before it, and has already flown civilians into space.
After a number of delays, the company plans to launch commercial operations for its space tourism business in the second quarter of 2023. Tickets for a flight could be over $400,000, and the company hopes to ramp up both flight frequency and the number of spaceports it has in the coming years.
The challenge is that we don't know the upside of this business. The company has a $1.5 billion market cap, and if it can hit the goal of 1,565 passengers flown per year set forth in its special-purpose acquisition company (SPAC) documents, this could be a business with over $600 million in annual revenue.
Space tourism and any disruption that comes after that (like mach speed travel) are highly risky, but that's part of investing in disruptive companies. Of the three, this is the one with the most potential and the highest probability of not getting off the ground.
Risk and reward from disruptive stocks
The audio space, cryptocurrencies, and space travel are in need of disruption, and these three companies are leaders in the disruptor space. That means they have big potential markets and could be huge winners for investors. But with big rewards come big risk, so be aware that not all disruptors come out on top in the end.
