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The Next FAANG: The SUV Driving Future Growth

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 FAANG Big Tech icons (Facebook, Amazon, Apple, Netflix & Google). FAANG is an acronym Of nan 5 beardown stocks successful nan Nasdaq exertion stocks index.

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Overview

10 years ago, nan word "FAANG" was coined to correspond nan precocious maturation stocks that would thrust awesome gains successful nan banal marketplace (SPY) for nan adjacent decade. It is nary coincidence that these companies each play a awesome domiciled successful mundane life, not conscionable past but besides now. It is my belief that members of nan caller FAANG will besides grounds nan aforesaid characteristic of being portion of our mundane lives. That is why I break down nan anticipation of Spotify (SPOT), Uber (UBER), and Visa (V) being awesome imaginable players successful nan adjacent procreation of growth, coining nan word SUV.

It is difficult to reason that Spotify and Uber are not progressively becoming a constituent of mundane life. I person written a much elaborate explanation of nan disruption that Spotify has caused successful a erstwhile article recovered here. Essentially, SPOT now has nan advantage of being played everywhere, anytime, done astir each audio mean arsenic opposed to nan myriad of playing devices and forms successful which euphony was played conscionable 15 years ago. As for Uber, I deliberation you'd beryllium difficult pressed to find galore cellphones successful municipality and suburban areas that don't person nan app downloaded and often used. Lastly, Visa is nan number 1 costs processor and in installments paper supplier successful nan world that is still sitting successful nan mediate of nan rate to cashless world transition.

An important facet that I for illustration to see for early maturation companies is nan generational replacement value. For much clarity, I americium looking astatine really a institution will use from generational changeover. To item this, I will usage a hypothetical business pinch Uber for what could hap successful nan adjacent 10-20 years arsenic location is simply a ample turnover successful nan babe boomer procreation to Gen Z and beyond. Let's opportunity that location is simply a organization of 50 cardinal babe boomers successful North America and that astir 20% of them person nan Uber app and usage it connected mean astatine slightest erstwhile per month. Now, let's opportunity that nan adjacent 50 cardinal successful organization successful North America that turn into adulthood and go consumers will beryllium a portion of Gen Z while nan adjacent procreation is being calved that is replacing nan boomers and will yet property towards becoming consumers. Hypothetically, let's opportunity this adjacent 50 cardinal user group entering nan system has a 80% complaint of Uber downloads and monthly usage.

Population Usage (%) Total Users
Baby Boomers 50 million 20% 10 million
New Gen. Z 50 million 80% 40 million

By doing immoderate speedy mathematics we tin spot that location would beryllium a monolithic summation successful monthly users owed purely to generational turnover moreover if nan full North American organization stays level aliases moreover decreases.

Spotify

Spotify is nan undeniable leader successful euphony streaming and full number of listeners crossed nan globe. To make this moreover much attractive, it is quickly moving to grow its margins. There is still a ample opportunity successful addressable marketplace description and mean gross per user, ARPU, growth. Below I will item a exemplary that shows really powerful nan maturation of SPOT could be. Here we will usage nan astir caller yearly metrics and input nan 2027 targets outline by nan institution to foretell wherever Spotify mightiness beryllium successful 5 years.

  • SPOT guidance is targeting 10% operating margins by nan extremity of 2027
  • Spotify has seen 15-20% monthly personification maturation complete nan past respective years, nevertheless I will usage a much blimpish maturation complaint guardant of person to 10%
  • Assume a simplification of astir 3 cardinal shares by past extremity of 2027 arsenic nan institution continues to buyback shares
  • Assume full maturation successful ARPU of 10.5% by nan extremity of FY2027

FY2022A FY2027E
Monthly Active Users (MAU's) 489 million 800 million
ARPU €23.98 €26.50
Revenue €11.727 billion €21.200 billion
Operating Profit -€431 million €2.12 billion
Shares Outstanding 192.9 million 190 million
EPS -€2.23 €11.16

There is simply a ample quality successful nan EPS that Spotify tin nutrient if nan institution targets and these comparatively blimpish inputs are met successful nan adjacent 5 years. If we use a 25x P/E multiplier that is akin to existent awesome maturation stocks to nan last EPS estimate, we get astatine a target value of $279. This is simply a 121% summation from today's price.

Uber

Uber has arguably been nan number 1 beneficiary of nan "gig economy". But I judge location is simply a deeper meaning down nan emergence successful Uber different than group being lazy aliases expanding their spending habits. I deliberation Uber really operates arsenic a societal request for 3 reasons.

  1. Uber provides an highly effective solution to drunk driving, a calamity that takes acold excessively galore lives each year.
  2. It is simply a much effective usage of fossil fuels and power owed to nan truth that galore riders are successful parties of 2 aliases much and that Uber's navigation is built to optimize drop-off and pick-up routes.
  3. Rising costs of surviving versus slower maturation of wages creates nan request for a ample information of nan organization to find further sources of income and go drivers.

I judge nan implementation of Uber One is genius, giving it different limb successful nan gig economy. The summation of nutrient transportation and now different services specified arsenic package transportation to nan Uber full offering allows Uber to summation nan inferior of its driver's vehicles exponentially and provides aggregate avenues for growth. The monthly subscription exemplary is nan icing connected nan barroom arsenic it will lead to greater personification retention, greater web effect, and will stabilize revenue.

Excitingly, Uber precocious posted its first profitable 4th and looks arsenic if location is simply a runway to accelerate its profitability. The early is agleam arsenic good erstwhile we return into information its forays into nan rental car marketplace and nan imaginable for world description . Based connected existent expert projections, gross is expected to proceed to turn astatine a blistering pace. If nan institution is capable to proceed its betterment of its profit margins, location is tremendous upside for nan future.

Expected gross maturation of Uber

Uber Revenue Estimates (Seekingalpha.com)

Visa

I person antecedently written my thesis connected Visa and why I judge truthful powerfully successful its early growth. In this article I will analyse nan similarities of Visa pinch a bluish spot maturation gem of nan past decade, Microsoft (MSFT). Let's first look astatine 2013 Microsoft and spot really akin it is to coming time Visa.

2013 Microsoft Current Visa
Net Profit Margins 28.08% 50.28%
Rev. Growth (5y Avg.) 10.84% 10.91%
Market Cap $310.5 billion $454 billion

It is absorbing to spot nan similarities successful gross maturation and nan truth some are successful nan mega-cap banal category. Visa's visibly greater profit margins are apt nan logic for nan larger marketplace headdress arsenic it commands higher multiples than MSFT did successful 2013. If we accelerated guardant to existent time Microsoft, we spot that nett profit margins person expanded to 35.05% (a 25% description from 2013), gross continued to turn astatine astir 11% for nan past 10 years, and nan marketplace headdress has accrued much than 6x to a whopping $1.87 trillion.

While I would beryllium impressed if Visa could grow its already marketplace starring profit margins by different 25% complete nan adjacent decade, it isn't retired of nan mobility that it will spot a meaningful description arsenic cashless payments proceed to accelerate and nan scalability of its business exemplary supply accrued effects connected margins. Current estimates show a greater than 11% gross maturation for nan adjacent respective years, successful statement pinch what MSFT was capable to execute complete nan past decade. If Visa is capable to execute this continued beardown maturation and an description successful profit margins, it seems feasible that nan banal could spot beardown returns by 2033.

Risks

Obviously, location are a batch of assumptions built into these projections and early macroeconomic influences are intolerable to predict. Additional awesome risks for Spotify and Uber are competitors that statesman to claw distant marketplace stock aliases create technology/services that makes their offerings obsolete. Secondly, some companies person not proven they tin execute and support profitability but I judge nan size of each of these companies and visible caller improvements successful margins show that guidance knows what they are doing and person a scheme for nan future. Visa besides runs nan consequence of caller exertion and competitors specified arsenic bargain now salary later, caller fintechs, and cryptocurrencies. In my sentiment however, V has addressed these threats and moreover began to adhd these technologies to its business either done acquisition aliases integrated development.

Summary

After looking astatine each of these companies pinch a 10 twelvemonth bargain and clasp lens, each 3 look promising. Personally, I deliberation generational replacement worth is an underrated root of maturation for caller companies successful caller industries and will beryllium an underlying tailwind for some Spotify and Uber. Lastly, these companies grounds galore of nan aforesaid characteristics arsenic nan FAANG stocks successful nan consciousness that they are a portion of mundane life. A ample information of nan world already has nan Uber app, nan Spotify app, and a Visa paper each successful their pouch connected a regular basis. The mobility I conjecture you request to inquire is: Do you spot yourself utilizing Spotify, Uber, and a Visa in installments paper 5-10 years from now?

This article was written by

Financial Engineering floor plan picture

I americium an electromechanical technologist who has worked successful nan automotive, IT infrastructure, and aesculapian instrumentality industries. My extremity is to nutrient method breakdowns connected institution products and stock my manufacture experiences to supply penetration connected existent engineering trends. Providing existent world merchandise knowledge connected caller trends aliases comparatively chartless engineering developments gives readers a unsocial advantage erstwhile conducting investigation connected a imaginable investment.I americium a agelong word buy-and-hold investor who seeks investments pinch beardown rate flows that nutrient a increasing passive income watercourse aliases heavy put into R&D.

Disclosure: I/we person a beneficial agelong position successful nan shares of V, MSFT either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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