I was intrigued when I saw an ad from Timothy Lutts at Cabot about their “Next Netflix” stock, pitched as the next opportunity for a $600,000 windfall. Who doesn’t want that, right?
That windfall figure refers to their recommendation of Netflix in May, 2002 — they say that $5,000 in NFLX then would have turned into $600,000 today. I don’t know if Cabot really recommended Netflix back then and recommended holding the shares the whole time (May 2002 was when NFLX had its IPO), but if they did make that recommendation the numbers do match up — the shares are up roughly 12,000%, and that would indeed get you a profit of $600,000 on a $5,000 investment if you had simply bought and held for almost 15 years (though there were also several drops of 50% or more along the way, so “buy and hold” would have required a pretty strong stomach).
And the tantalizing bait waved in front of our noses is that they’re making a pick that they think will have similar potential next week — here’s how they put it:
“Introducing The Next Netflix….
“On Thursday, March 9, we will be releasing the name of The Next Netflix—another little-known company that’s riding the trends higher, dominating its sector and richly rewarding investors along the way.”
So who is it? Well, we don’t want to wait until March 9… and we probably won’t want to pony up whatever the cost might be for their Cabot Prime service, so let’s look into the ad and see if we can name that stock. We get a few clues — here’s what I fed into the Thinkolator for you:
“… this company profits from data mining and from selling that golden information for billions of dollars.
“As a result, this data mining company has built a 90% market share in its sector and is beginning to reap the rewards—with its stock price rising 272% in the past five years. All thanks to 50% year-over-year sales growth and a whopping 194% year-over-year earnings growth.”
And there’s also a reference to some of the other major shareholders:
“Twenty of the world’s shrewdest institutional investors and mutual fund managers see Netflix-like gains here as well, together owning nearly $1 trillion in stock.
“I speak, for example, of…
- FMR LLC $17 billion
- Vanguard Group $15 billion
- State Street. $9 billion
- Price Associates. $7 billion
- Blackrock Fund Advisors. $6 billion
- JPMorgan Chase $3 billion
“They’ve gone all-in here for the same reason we have: they see this company’s 194% year-over-year earnings growth continuing for the next 10 years as its billion-person database continues to expand and the world’s biggest consumer-goods companies rush to cash in on this company’s marketing gold.”
So this is where we get to apply a little logic — first, there is no company where “institutional investors” and the like own “nearly $1 trillion in stock.” Unless you’re really free with the definition of “nearly.” There are no public companies that are worth $1 trillion right now, and obviously you can’t own $1 trillion worth of something if the whole is worth less than $1 trillion.
But still, if we assume that the holdings are reasonably accurate, we can easily narrow this down to roughly the top 100 largest companies in the world. Those institutional owners, who are major owners of essentially every large cap stock (partly because FMR (Fidelity) and Vanguard and State Street and Blackrock manage huge index funds that own large portions of all the largest companies in the world), collectively own $57 billion worth of shares. And presumably other folks own some, too.
So it’s a really, really big company we’re talking about here. Netflix back in 2002 had a market capitalization of well under $1 billion, in case you’re wondering — so that means we should probably put aside those dreams of 12,000% gains, you generally have to start pretty small to get those kinds of gains. Even if the market cap is “only” $50 billion for this “Next Netflix”, a 12,000% gain would get you to a $6 trillion market cap… and, as I noted, no public company has every yet sustained a $1 trillion market cap… (only Apple at $700 billion and Alphabet at $550 billion are even more than halfway to that mark… though, to be fair, PetroChina was very briefly a $1 trillion company around the time of its IPO, and Saudi Aramco would probably be a $3 trillion company if it were public, and, if you adjust for inflation, past Goliath’s like the Dutch East India Co. and South Sea Co would have been multi-trillion-dollar companies in their day, and even Microsoft would have gotten to about a $900 billion market cap in 1999).
I’d assume that we’ll only see a $6 trillion market cap after another bout of pretty lofty inflation, at which time $6 trillion won’t seem like quite as high a number as it does today… but I suppose you never really know.
But anyway… what is this company they’re pitching as “The Next Netflix?”
Well, the numbers do not match up perfectly… but they’re awfully close. Thinkolator says “The Next Netflix” must be… Facebook (FB)
Yep. Really. Little ‘ol $400 billion Facebook.
Why the match?
Well, Facebook has recently had 50% revenue growth year over year… which itself is a ludicrous growth rate for a large cap company. If you screen for companies with market capitalization over $50 billion and revenue growth of 40% or better, you’re left with only about 20 companies to choose from. Some have growth because of recent acquisitions or mergers, like Broadcom or Chubb, some because their industry perked up suddenly like BHP Billiton, or because they’re coming out of a nasty trough like Toyota or Honda or Banco Bradesco, but those that jump out as real “growth” companies on the list, with some reasonable expectation of sustained growth at something like that level are Alibaba, Facebook, NVIDIA, and Tencent, all large tech companies.
And, of course, the only one of those that is close to 272% five year growth on the stock chart is Facebook. Which hasn’t technically been public for five years yet, though it’s close. NVIDIA’s growth is far more impressive at 750% or so (almost all of that just in the past year), and Tencent is also substantially higher at 375%. Facebook is currently up 259% from its IPO, though you could turn that into 272% if you chose a different day over the following few months — as you might remember, FB stock fell almost 50% in its first year before starting to climb in mid-2013. And in case you’re wondering, Netflix is up about 1,300% since the Facebook IPO.
Facebook also has had earnings growth of close to 194% — that’s the number it hit in the March quarter last year, so it’s a little stale and recent quarters have been slightly less impressive (the current earnings number is 160-170% as of December, depending on whether you look at basic or diluted earnings per share). But still, a pretty good match as far as teaser clues go.
And Facebook is, indeed, the ultimate data mining company. They do know more about a billion+ people around the world than anyone else, and they are turning that knowledge into profits — so far, mostly by using the data to sell more effective advertising, but who knows how the data will be used in the future.
So yes, I can’t come to any other conclusion on this one. Cabot is pitching Facebook as “The Next Netflix”, and presumably that’s more because investors underestimate how FB is transitioning from social networking to monetizing the data they collect than because it has the same kind of long-term share price appreciation as Netflix had when it was a small cap company (The argument from Lutts is that Netflix transitioned from mailing DVDs to streaming video, also misunderstood at the time, and that this is another misunderstood transition opportunity). And presumably they’ll be releasing that “free” report about it on March 9 (I’ll keep an eye out then to see if it really is free).
And since Facebook is one of the largest companies in the world, and among the most popular and widely-held stocks despite the recurring panics that their money balloon might pop (because of Twitter or Instagram a few years ago, or Snapchat today, or whatever competitor gets teens excited and worries FB shareholders until they see another quarterly blowout from Zuckerberg et al), we can rest assured that this recommendation, assuming the Thinkolator is correct, will not have any impact on the stock.
So you’ve got plenty of time to think it over and decide whether you want to own FB shares (or, if you already have money in widely-diversified funds, you can rest easy knowing that you probably already own a few shares — Facebook is 1.5% of any S&P 500 index fund, or about 5% of the Nasdaq QQQ ETF for folks who are allocating more to big-cap tech stocks).
I own Facebook shares, it’s been one of my largest personal holdings for a few years (currently it’s my second largest individual stock position, after Berkshire Hathaway), and with a forward PE of only 20 (2018 estimates are for $6.72 in non-GAAP earnings per share) I think it’s still reasonably valued… but I don’t expect the shares to be able to turn $5,000 into $600,000 anytime soon.
How about you? Think Facebook is as misunderstood and high-potential as Netflix was in 2002? Think Cabot’s maybe being a little silly with that comparison? Have an opinion on Facebook at all? Let us know with a comment below… it is, after all, your money, so your thought is the one that matters.
P.S. In case you’re curious: If Facebook rose 12,000%, it would be just shy of having a $50 trillion market cap. I’d personally settle for a couple hundred percent over the next decade, assuming that all keeps going along swimmingly for Zuckerberg’s little dorm room project and he keeps building on Facebook’s dominance with artificial intelligence, more video, and more messaging monetization… but we’ll see.
Disclosure: I own shares of Facebook, Alphabet and Apple. As per Stock Gumshoe trading rules, I won’t trade in any of those stocks, or in any other investments covered, for at least three days following publication.