The Next Google? How to Spot a Stock That’s About to Soar
Google held an initial public offering on August 19, 2004. The IPO came out at $85 per share. If you had bought 10 shares that day and never sold, you would have 12 class A shares and 12 class C shares today—thanks to a stock split and stock dividends—which would be worth $21,470 today, a 2,425 percent total return.
So if you were trying to pick the next Google, how would you do it? Let’s take a look at what some of the best-performing stocks have in common.
Look for Ideas That Change the World
Early investments in companies like Microsoft, Amazon, Apple, and Google provided investors with massive returns. While they may be atypical for the market overall, it is exciting to consider how you may be able to replicate the results of investors who brought home 1,000 percent or better from a single stock.
Looking for what makes these companies similar, they all had an idea that changed the world. Microsoft helped put a computer on every desk in every workplace and most homes in the world. Google changed how we search for information. Amazon changed how we shop. Apple changed how we use phones and the internet. And massive growth is not limited to the technology industry—between 1996 and 1999, Walmart saw its stock price multiply six times as it cemented its position as the world’s largest brick and mortar retailer.
Identify Companies That Can Follow Through on That Promise
GoPro promised to change how we capture and edit video, with its namesake GoPro camera at the front and center.
After an IPO at $24 per share, the stock shot up to $86 per share over the following months. Then came a long, slow decline that brought the stock down to the current price around $10 per share. What happened at GoPro that made it different from Facebook, Google, and Amazon?
GoPro did not actually change the world.
It just makes cameras. And while it sells over $1 billion worth of cameras every year, the company saw sales decline in 2016 and net profits turned into a net loss. With the exception of Q2 2017, the company has seen growing losses every quarter over the last year. Just because GoPro wanted to change the world does not mean it had the ability to do so, or even earn a profit.
Facebook was able to follow through on its vision. Thanks to the right product and the right leadership, the company has grown steadily from an IPO price of $48 per share to the current $171. With billions of users and a $10 billion profit it 2016, there is little question as to why Facebook has quickly become one of the world’s most valuable companies.
The Biggest Returns Require Early, Risky Investments
Tesla is another company with lofty goals to change the world. What began as an electric car manufacturer has grown into one of the largest producers of batteries in the world. Tesla owns solar power business Solar City, released the Tesla PowerWall, and is building a $1 billion “Gigafactory” in Nevada to capture additional economies of scale in battery production.
Tesla’s stock price is on a wild ride. The stock hovered around $30 to $40 per share until 2013, when the stock began an upward roller coaster.
The stock price currently sits at $365 per share, ten times the price just four years ago. But even now, questions over the ability to deliver car orders and contain costs makes this a risky bet. The stock could double or more if Tesla’s latest projects prove to be a success, though there is plenty of risk that the company could go broke. It has not earned a profit in any of the last four years. Between 2014 and 2016 the company had a total net loss of about $1.8 billion.
Take a Venture Capital Approach to Improve Your Odds
Venture capital firms invest in risky startups knowing most of their picks will fail. If they make ten bad investments and one offers a 10x return, however, the company will break even despite the losses. The same is true of risky stocks. If you own a diverse portfolio, it does not matter if a few stocks fall.
If you hit it right with one or two good stock picks, it can make up for losses across your portfolio.
This is not a foolproof tactic, as it is possible for your entire portfolio to drop at once, as happened to most investors in The Great Recession in 2007 and 2008. But spreading the risk across many stocks will help alleviate the risks of investing in speculative, high risk stocks.
Weigh the Risks and Rewards of IPO Investments
To get the best returns, investors are smart to buy into an IPO as early as possible. Some will turn into a loss like with GoPro, and others may turn into the next Google.
The next biggest companies in the world are not born every day. They are few and far between. But if you can pick the next world changing idea with the right team behind it, you may be on to the next Google.