Following its seizure by the FDIC and subsequent sale of its assets to JPMorgan Chase, First Republic Bank was replaced by Axon Enterprise in the S&P 500 index.
Comprising 500 of the biggest and best U.S. stocks, the historic index has already made five additions in 2023, leaving investors to wonder what qualifying stocks could join the S&P 500 next.
Three businesses that may fit the bill are The Trade Desk (TTD -0.54%), Veeva Systems (VEEV -0.71%), and Airbnb (ABNB 0.10%) because each dominates their respective niches and meets the requirements.
Let's explore what makes each company a worthy pick.
1. The Trade Desk
Operating in the communication services sector, The Trade Desk's technology-focused ad-buying platform would bring modernized advertising solutions to the S&P 500 index. While the index already has two advertising agencies, The Interpublic Group of Companies and Omnicom -- which were added in the '90s -- The Trade Desk's disruptive ad operations offer high growth in a stodgy industry.
TTD Revenue (TTM) data by YCharts.
Furthermore, the company's focus on building an open internet stands in stark contrast to the many "walled gardens", such as Alphabet's Google search or Meta Platforms' Facebook, with both companies already included in the S&P 500. Although these mega stocks and their walled gardens are often viewed as a necessary evil for brands to do business with, The Trade Desk's data-driven (and transparent) solutions are rapidly gaining market share.
In the fourth quarter of 2022 alone, the company posted a 24% increase in ad spending -- three times that of the global advertising market. This growth is all the more incredible considering its most prominent peers saw a 2% to 9% decline in ad spend during the same time.
With its management guiding for 15% sales growth in Q1 and analysts projecting a 25% increase in 2023, The Trade Desk looks likely to build upon its already impressive $30 billion market capitalization.
Buoyed by multiple operational tailwinds -- connected TV, global expansion, and shopper marketing -- the company's Unified ID 2.0 (UID2) solution could propel the stock higher. The open-source technology helps power the open internet by converting email addresses into anonymized IDs, acting as an upgrade to traditional advertising cookies.
CEO Jeffrey Green believes over 75% of ad estimates placed will go through UID2 by the second half of the year, having already been adopted by notable names like Amazon's AWS, Adobe, Snowflake, and Salesforce.
Led by this rapid uptake, multiple tailwinds, and GAAP profitability since 2013, despite heavy stock-based compensation, The Trade Desk is an excellent candidate to join the S&P 500.
2. Veeva Systems
Sporting a market capitalization of $28 billion, Veeva Systems provides cloud-based software to the life sciences industry. Through two primary segments, R&D solutions and commercial solutions, Veeva's software suite helps its customers digitize their data and operations, regardless of where they are in their business life cycles.
Whether early in the clinical trial process and needing help to manage the overwhelming amount of data used, or a mature pharmaceutical looking to improve its marketing efficiencies or grow its customer data, Veeva undoubtedly has a solution.
Although Veeva increased its customer base by 14% to almost 1,400 clients in the fourth quarter of fiscal 2023, it is still in the early chapters of its growth story, with market penetration rates of just 30% and 5% in clinical operations and clinical data, respectively. Equally as exciting, the company landed a massive 10-year deal with pharmaceutical giant Merck in 2022, demonstrating its appeal to even the largest businesses in the world.
With management guiding for a minimum of 10% sales growth in fiscal 2024 and an increase of at least 19% in 2025 -- and more of these megadeals potentially on the way -- Veeva looks poised to re-accelerate its revenue growth in the coming years.
Sporting a price-to-earnings (P/E) ratio of 59, Veeva remains expensive. However, its stellar 23% net income margin and 33% free-cash-flow (FCF) margin hint that Veeva's moat is growing ever wider, making it an intriguing candidate for the index as it continues adding the world's largest pharma companies as customers.
3. Airbnb
Home to over 4 million hosts in more than 100,000 cities, Airbnb's quickly growing nights and experiences platform is rapidly being adopted among the younger generations. With roughly 62% of its guests currently 34 years old or younger, Airbnb has been an intriguing case study in the work-from-anywhere movement spurred by its youthful customer base.
Currently commanding a market cap north of $75 billion, the company's newfound profitability of $1.9 billion in net income over the last year makes it eligible to be added to the S&P 500.
Perhaps more interesting to individual investors, despite growing sales by 40% in 2022 -- while generating $3.4 billion in FCF -- Airbnb's share price remains down over 20% in the last year.
Now trading at 23 times FCF, and considering management's guidance for 16% to 21% revenue growth in Q1 of 2023 versus the year-ago quarter, the stock looks reasonably priced. Moreover, with analysts expecting a solid 14% revenue growth for all of 2023, investors may be wise to consider Airbnb's burgeoning two-sided network effect at today's prices.
Two-sided network effects are potent for businesses because each new participant -- guests and hosts, in Airbnb's case -- adds theoretically compounding value as they join. Even better for potential investors in the company: 36% of Airbnb's current hosts were once guests on the platform.
This is very interesting as it demonstrates a "stickiness" from users returning to the platform and a nice flywheel effect as guests transition to become hosts over time, creating a more robust two-sided network. As hosting becomes increasingly mainstream, look for the S&P 500 index to give the young company consideration over the coming years.
