Investing may not be everybody’s idea of excitement, but when I read Peter Lynch’s One up on Wall Street a big light came on for me right at the start. At the end of the introduction to the millennium edition, Lynch lists the returns on a $10,000 investment in various stocks covering the 10-year period from 1989-1999. Dell Inc. (NASDAQ:DELL) returned $8.9 million. In Lynch terminology an investment that doubles is a 2-bagger. That makes Dell Inc. (NASDAQ:DELL) an 890-bagger.
A single investment like this will change your life. And I call that exciting.
Of course, for every investor who bought Dell, there will be many more that didn’t make anything like that sort of return, and a fair few who lost the whole $10,000 (by comparison, $10,000 invested in Dell in 1999 would be worth only $2,800 today). So, is investing like buying a lottery ticket, or are there steps that we can take to shorten the odds in our quest to find that elusive 100-bagger?
Let’s take a look at some companies with the ability to grow quickly, getting popular coverage on the Fool services.
LinkedIn Corp (NYSE:LNKD) is a business with a lot of fans. LinkedIn Corp (NYSE:LNKD) had revenue of $243 million in 2010, $522 million in 2011, and reported revenue of $972 million in 2012. Is this a potential 100-bagger?
Mark Mahaney of Citigroup has estimated the size of the online jobs recruitment market to be $3 billion. LinkedIn gets most of its revenue from online recruitment, and it is fast eating up most of the apparent, available market. The market is likely to expand as online recruitment displaces traditional recruitment methods. And LinkedIn can build on its other revenue sources.
LinkedIn’s current market capitalization is $19 billion. For a 100-bagger this needs to increase to $1,900 billion. For simplicity, let’s use some round numbers and assume net profit margin of 10% and a P/E of 10. That would require revenues of $1,900 billion. Given that today’s total worldwide recruitment market is estimated at just $369 billion, this is clearly unrealistic. LinkedIn may well be a nice 5-bagger, or perhaps a little more. But a 100-bagger? No way.
How about another hot, rapidly expanding company – Tesla Motors Inc (NASDAQ:TSLA). In the final quarter last year, Tesla Motors Inc (NASDAQ:TSLA) improved revenues by 500% over the previous quarter by building 500 cars. This year the company expects to produce 20,000 cars and recently announced guidance that it will meet production targets and reach profitability in the first quarter.
Tesla Motors Inc (NASDAQ:TSLA)’s market capitalization is currently $4.8 billion, so we need it to become $480 billion for a 100-bagger. Again, keeping things simple with a net margin of 10% and P/E of 10, we need to see revenues of $480 billion. That would translate to sales of 5.6 million Model S cars at $85,000.
As Elon Musk estimates worldwide demand at 40,000 units this is clearly unachievable with the present model. With a future Gen III low-cost model in the pipeline we may see better revenues through high volumes, but we would still need a turnover that is more than three times that of Ford Motor Company (NYSE:F). Realistically, for our 100-bagger, we need to look elsewhere.
New disruptive, technology may provide the answer – Dell’s rise was propelled by the widespread adoption of PCs. 3D Systems Corporation (NYSE:DDD) is a market leader in 3D printing. Its market capitalization of $2.9 billion would need to grow to $290 billion for a 100-bagger. Keeping to our simple formula of a 10% margin and a P/E of 10, that would require revenues of $290 billion. Global Industry Analysts predict a worldwide market of just $2.9 billion by 2013. Again, 100-bagger status looks unachievable.
However, in a fast developing market based upon new technology predictions are often hugely inaccurate and too pessimistic. (“I think there is a world market for maybe 5 computers.” — Thomas Watson, IBM founder, 1943.) So maybe there is a very slim outside chance for 3D Systems Corporation (NYSE:DDD) to become a 100-bagger. But can we find better odds than this?