2 Ways Disruptors Can Make You Rich

Sometimes I stumble across an old article of mine that seems more potent now than it did at the time. A little more than three years ago -- Jan. 8, 2013, to be exact -- I offered up an article on three disruptive growth stocks that I thought were worth buying at the time. It turned out to be pretty sage advice. 

Zipcar had just announced that it was being acquired by car-rental company Avis Budget Group, sending shares of the leading car-sharing company 48% higher. Yes, before the ride-sharing craze we had a booming trend where folks were renting from a fleet of vehicles by the hour. Zipcar was disruptive to traditional auto-rental giants, so it wasn't a surprise that one of them would pay a premium to take it out.

There are three scenarios for disruptive growth stocks. They can be acquired, as we saw with Zipcar. They can grow over the years, cashing in on creative approaches to existing pressure points. They also often fail, and when that happens it's obviously not pretty. No one said investing in disruptors doesn't come with big risks if you wind up stuck with what's behind Door No. 3.

In that now 122-month old article, I offered up three disruptors -- SodaStream, Tesla Motors (TSLA -1.92%), and Netflix (NFLX -9.09%) -- that I thought were worth buying as potential buyout candidates. All three went on to take different paths in crushing the market.  

Image source: Getty Images.

Disruptors can get acquired 

SodaStream made it easy for anyone to make cola and other soft drinks at home. The Israeli company's platform, propelled by interchangeable CO2 canisters, carbonates still water at the push of a button. SodaStream also sells soda syrups. SodaStream was faring well as a novelty for pop connoisseurs, but then flavored sparkling waters took off.

Just as we saw Avis Budget eventually buy Zipcar, SodaStream eventually attracted an all-cash $3.2 billion deal to be acquired by PepsiCo (PEP 1.08%) in 2018. The deal cashed out SodaStream investors at $144 a share, more than tripling the return from the time of my initial article. 

That's a pretty good haul for any investor. You probably already know that Tesla and Netflix fared even better.

Disruptors can keep disrupting

Successful disruptors will be approached by slower-growing giants on bended knee. You can't blame a Zipcar or SodaStream for bowing out at a healthy premium, especially when the buyer could emerge as a bigger threat if it gets shot down. 

Tesla and Netflix naturally did more than just triple over the past decade. They have continued to grow, and now they are the companies being followed. The math is kind when things work out that way.

Data source: Yahoo! Finance and Investing.com. *SodaStream was acquired at $144 a share on 12/4/18. 

Tesla was just starting to make electric vehicles cool back in 2013. It had introduced the Model S in the summer of 2012. Netflix, meanwhile, was just two summers removed the Qwikster fiasco of 2011, but it was also already proving that focusing on streaming instead of mailed DVD rentals as the future of entertainment was the right call.

The future was kind to Tesla and Netflix. Tesla revolutionized the automotive market, and it's now in the pole position, with most automakers trying to catch up in the EV market. Netflix now has more than 230 million streaming paid memberships worldwide. The media moguls it was chasing are now chasing Netflix, and right now it seems as if the disruptor is the only one excelling at generating profits and free cash flow in the digital divide. 

It would be wrong to gloss over the third scenario. I've written about a lot of promising companies hoping to "upend" industries that "end up" being upended themselves. Many if not most potential disruptors fail, but that only means you should buy several disruptors. A winner or two -- like Tesla and Netflix in this case -- would be more than enough to offset several failures. If you're willing to take on the risk, it's OK to fail. Sometimes failing is the only way to succeed.