Every investor wants to own stocks that will go up five times, 10 times, or even more from their purchase price.
There's no easy way to find these breakout stocks. Often they are disruptors, but not every business with a disruptive concept actually goes on to change its industry. High revenue growth is a good clue -- but even more important is that they are steadily gaining market share compared to their (often much larger) competitors.
Gaining market share alone doesn't make a company successful -- many early-stage disruptors are unprofitable, and profits have to come eventually. But that's often easier with greater market share, as that allows a company to achieve economies of scale.
Image source: Getty Images.
Unlike with revenue or profits, finding a company's market share isn't always clear. Most companies don't publish this information, and the boundaries of a given market aren't always well-defined. Some companies, like Redfin, publish market share data in their earnings reports, and many companies, especially in the tech sector, will tell you what their addressable market is so you can determine their market share by taking revenue as a percentage of that. With other companies, you can find data from third-party sources like eMarketer in e-commerce, Nielsen in media, or trade magazines and research firms in other industries.
Often the best way to determine if a company is gaining market share is simply by comparing its revenue growth to that of its peers. If a company can do that over a long period of time, it can deliver huge returns.
Let's take a look at three such success stories.
1. Amazon's conquest of retail
Since its initial public offering (IPO) in 1997, Amazon (AMZN -1.65%) has delivered a return of nearly 100,000%, which would make $1,000 invested in the company at its IPO worth around $1 million at recent prices.
Most investors are familiar with the company's history. It gradually expanded from its start as an online bookseller to new categories, adding its third-party marketplace, Prime membership program, devices like Kindle, and eventually its cloud-computing behemoth Amazon Web Services (AWS).
But what was notable about founder Jeff Bezos's strategy is that he focused on gaining market share rather than delivering profits, believing that market share would allow Amazon to layer on more profitable businesses -- which it has done in areas like advertising, its third-party marketplace, and even AWS, which started out serving Amazon's e-commerce business. Market share gave it control over the customer, which allowed it to do other things.
The chart below shows how Amazon's revenue growth compares with that of Walmart, the retail giant that once dismissed the threat from e-commerce.
AMZN Revenue (Annual YoY Growth) data by YCharts
As you can see, Amazon has been gaining market share on Walmart throughout its history, and today has nearly as much revenue as Walmart does. That's a big part of the reason for Amazon's success.
2. Netflix's takeover in television
Like Amazon, Netflix (NFLX 1.74%) started small and was ignored by industry incumbents for years. But the streaming stock has generated a return of 27,000% since its 2002 IPO, turning $1,000 into roughly $250,000 at recent prices.
While profits would take a while to come to Netflix, it took over market share in the DVD rental business, eventually putting Blockbuster out of business. It's now doing the same to the cable TV industry, with a number of legacy media companies joining the streaming fray.
Perhaps the best way to assess Netflix's market share gains is by its subscriber base. In its most recent quarter, Netflix counted 73.4 million paying members in North America, or a little more than half of the total number of households (about 140 million).
That number has grown steadily over the course of Netflix's streaming history. Ten years ago, just 28 million households in North America paid for Netflix.
Meanwhile, Pay TV subscribers, which include cable, satellite, and telecom, have fallen to 77 million from over 100 million a decade ago.
Netflix's victory over the traditional cable bundle is a big reason for the company's success.
3. Tesla's disruption in electric vehicles
Tesla (TSLA 4.96%) shares are up more than 7,000% at recent prices since the electric vehicle (EV) company went public in 2010, and the company has overcome steep odds to make electric vehicles mainstream in the U.S.
While the company's biggest accomplishments may have to do with engineering, one reason why the stock has been so successful is that it's rapidly gained market share in a huge market -- automobiles -- making it clear along the way that EVs are the vehicles of the future.
Much as Amazon grew over time by gradually taking market share from traditional retailers, so did Tesla with automakers. As the chart below shows, Tesla has grown revenue rapidly in a large and mature industry.
TSLA Revenue (Annual YoY Growth) data by YCharts
As you can see from the chart above, Tesla has grown revenue in the high double digits for much of the past eight years, while domestic peers like Ford and General Motors have been stuck with low-single-digit growth, or even negative growth in a number of years. Though Tesla's revenue is still about half of the leading domestic automakers', it's rapidly gaining on them and could become the biggest U.S. automaker by revenue in just a few years.
When you're looking for ten-baggers, market share shouldn't be the only factor you consider. You want to make sure you understand why the company is gaining market share, if the gains are sustainable, and if it has an economic moat. Additionally, there has to be a path to profitability. If the companies it's taking market share from are profitable, that's a good sign that a disruptor can be profitable.
It's rare to find a stock that meets all of these conditions, but when you do, it can lead to life-changing returns.
