What Transforming an Industry Does to Your Stock Price
Moral of this Story: If you’re going to write a piece about industry disruptors and rocket ships, make sure you act on it, and then hold on!
Published on July 20, 2020 by Clint Chao, Moment Ventures
Everyone likes to talk about industry disruption. With our current early stage firm, we’re building a portfolio of investments in very early stage technology companies that aspire to bring transformation to the operations or labor mechanics to large, existing industries. One thing I always like to ask myself when evaluating these types of companies is:
We’re still in the early days of our effort, so stay tuned, but the thing that seems to be true about these eventual market transformers: just like a rocket ship, there’s a ton of risk, doubt, naysaying and fear beforehand, but once everything comes together successfully and you hit liftoff, the trajectory is mind-boggling.
I was inspired to write this update piece after a friend recently reminded me of an old blog post that I made 7 years ago on industry disruptors.
A 2013 Blog Post on Industry Disruptors
Last week during an online Zoom poker session with friends, we got to talking about some of the crazy stock prices of late, and of course, we talked about Tesla (TSLA). As part of our chat, one of my friends asked me about an old blog post he recalled that I wrote years ago about companies that I felt were potential category disruptors (of which Tesla was one of them), and whether or not I had tracked the progress of those companies. Aside from Tesla, I had not, so I decided to look back into it.
Note: Although I am spouting off about public market investing, I am in no way a professional stock picker. In my day job, I invest in early-stage, privately-held companies, but when it comes to publicly-traded companies, I’m just an everyday hack with an opinion and a trading account.
First of all, here is that blog post from 2013:
In 2013, I noted that 4 groundbreaking and controversial companies from ten years earlier had made dramatic progress as public companies as they proceeded to transform the industries that they targeted: Apple (AAPL), Netflix (NFLX), Salesforce (CRM) and Amazon (AMZN) (right, everyone knew this. Amazing how hindsight works). However, their stocks appeared to be at sky high prices in 2013, and there were many critics out there claiming that they had run their course. As we see in this table comparing their stock prices from 2003 to 2013 to today, this was clearly not the case.
Okay, So Hindsight Works Great. How About Foresight?
The point of my 2013 post was to highlight four more recent companies making category-transforming innovations in their respective markets in the early 2010s, and note that if history taught us anything, that it would be wise to pay attention, buy a few shares, ignore the short term rollercoaster ride and hold on for the long haul.
The four companies that I highlighted then were equally as intriguing and just as controversial: Tesla (TSLA), Green Mountain Coffee (GMCR), Sodastream (SODA) and GoPro (GPRO). Note: since GoPro was still a private company then, I suggested tracking the company whose sole source video processor (at that time) was a decent proxy for GoPro, and that company was Ambarella (AMBA).
Again, you can read my very non-scientific rationale on selecting these companies in my 2013 post, but let’s see how they have fared since then:
You could probably conclude that I did “just okay” in my picks, as aside from Tesla, the others only performed modestly well and you could make the case that one was a total dud (GoPro). The two CPG companies (GMCR and SODA) certainly had the potential to further break out in a big way, but I was probably a little late on picking them out and they ended up getting acquired. If you were an earlier shareholder in either company though, you would have been super satisfied. Furthermore, if you still bought 100 shares of each stock on July 30, 2013 and held them until now or when they were acquired (and even rolled the original AMBA holding into GPRO at its IPO to follow my thesis), you would have grown $28K into $179K, so a nifty 6.5x return in 7 years. Just like with venture, oftentimes one outsized return (thanks Elon!) will cover you on all of your other bets. I’ll take that.
Can Tesla Keep Going?
The one thing that is constant water cooler (or Zoom poker screen) talk is whether or not Tesla has seen its best days already and is there room to grow? At >$1500 per share, you’re bound to get into an argument from people you talk to! And I’m sure you could quant yourself to conclude anything you want, but you could have easily done the same thing in 2013 on Apple, Netflix, Salesforce and Amazon. Don’t forget how much mud was flung on each of those companies in those days! Amazon has grown 10x since then!
For me, I’m happy to just hold on for the ride, as Tesla is singlehandedly transforming the auto industry against the biggest of obstacles and naysayers, and it still feels like really early days in that pursuit. And in 2020, it feels like the other players are trailing further behind, and Tesla can flex its technology muscle to keep creating more separation (let the arguments begin!).
Be the Pace Car for Your Industry
I always like to think of industry disruptors with an early lead as driving the pace car for an industry race. And, you’re armed with boxes of nails that can be tossed out of the window at moment’s notice to force those trailing to swerve wildly as you introduce new innovations. With its deep advantages in battery technology, software, self-contained charging ecosystem and more, Tesla still feels like it just stocked up at Home Depot! And I think the thing that makes Tesla seem more like its 2003 brethren than the other ones I noted is that Tesla has had it in its mission to go all the way on their own. They bet big on creating the entire ecosystem, and they seem to be in the process of running the table. Still has challenges ahead no doubt, but it would be very dangerous to be against them at this stage. I finally became a Tesla car owner over 10 years after I first became a shareholder, and I can now personally attest to the excitement that they’re building!
Real Industry Disruptors Eventually Bring Mind-Blowing Returns
The 2003 companies’ returns for shareholders are nothing short of stunning. If you bought 100 shares of each back then, you would have spent less than $5,000 in total, and today those shares would be worth more than $400,000, or 86x return on your investment. Chalk one up to the patient ones!
In any event, it was nice to look back on that old blog piece (thanks for reminding me, Michael!). While I invest primarily in much (much!) earlier stage private companies, I generally use the same litmus test when evaluating startups. I look for companies that have the potential to run the table on the target market by the clever use of technology to forever change behavior, transform how that industry works and perhaps earn the pace car slot for a good bit. Time will tell how well we have picked, but we are encouraged by the early signs we have seen. If you’re interested in seeing those companies, check out my VC fund’s website.
LOL Note: I noticed that at the end of that 2013 blog post, I included some links which had me projecting some other potential next generation disruptors. They were: Udacity, Uber, One Medical, Twitter, Lending Club, Dropbox and Atlassian. How’d we do?
As for predictions on more established companies in 2020 that might join this table-running group, I’ll think about it and save it for a future post, but giving it a quick thought, a few companies come to mind.
Disclaimer: As I noted in 2013, I wouldn’t consider myself an expert stock picker by any stretch of the imagination — in fact, I’m more of a hack, so take my thoughts with a grain of salt. I simply like companies for how they position themselves in the market, and usually trust my gut if I think they can pull it off.
Clint Chao is a General Partner at Moment Ventures, an early-stage venture capital fund based in Palo Alto, CA. You can reach/follow him on LinkedIn, Facebook and Twitter.
