Seeking Alpha

The Roaring 20s - 3 High Growth Areas For The Next Decade

|
Includes: ATVI, RDFN, TSLA
by: Ash Anderson
Ash Anderson
Long only, Deep Value, value, growth at reasonable price
Summary

Self-driving vehicles are on the way. This is a huge market that's ripe for the taking. Tesla has more data and equipped vehicles already on the road than anyone else.

As Gen-Z comes of age in the next decade, Esports will experience a huge boom. Activision is well positioned to take advantage.

House buying is changing. People don't want to pay 6% for visibly little work. Redfin will help change the housing market over the next decade.

Last decade was phenomenal for equities with several thousand+ percent gainers that we all dream of holding. Companies like Netflix (NFLX) returned close to 4,000%, or Domino's Pizza (DPZ) with a whopping 3,700%. Those are just a couple of the ten-baggers from the last decade.

Think back, if you will, to 2010. Think specifically about Domino's Pizza, or Netflix. These were known companies. They both had successful businesses already, and the average American probably knew their names. So how did they manage such tremendous returns?

Domino's Pizza spent the decade building out a robust infrastructure to ensure that your pizza ordering went as smoothly as possible. Netflix went from delivering DVDs to putting a world of entertainment at the end of your remote control. Both companies, and many more like them, used technology to differentiate their market. So, let's take a look at a few areas where companies today are using (newer) technology to differentiate and maybe return 1,000% this decade.

Self-Driving Vehicles

There are a multitude of publicly traded players here. The market, should it ever be conquered, is huge. Focusing just on the United States alone, the trucking industry is worth $700B. Then there's the delivery industry (think Fedex, UPS, Amazon), and the taxi industry. Transportation of goods and people, as I'm sure you know, is huge.

As I see it today, the largest players at the forefront of this movement are Tesla (TSLA), Alphabet (GOOG), Uber (UBER) and Lyft (LYFT). I have had a bit of an internal debate about my self-driving pick, mainly because the market is quite speculative. I settled on Tesla as I think there's a variety of reasons to believe they are best positioned and have the most opportunity going into this decade.

We're no doubt all familiar with Tesla, so I'll save you the introductory spiel and jump right to the meat of this section. Since 2016, every Tesla has shipped with the hardware required to drive themselves. With over 500,000 cars sold since then Tesla has an army of vehicles collecting and relaying data about how roads are designed, and more importantly, how humans react to any number of scenarios. No other company comes close to this amount of data.

Image: Tesla "Semi" via tesla.com

Tesla is also working on a long-haul freight truck, "Semi". The top spec of this vehicle has a quoted range of 500-miles and will ship with Tesla's Autopilot. Autopilot will allow drivers to run automated cruise control on highways, resulting in increased efficiency and safety. Several notable companies have already placed pre-orders for the somewhat self-driving Semi including Pepsi, Walmart and Anheuser-Busch.

So, we have lots of data, we have semi-trucks, but do you know what else? Well we know of Tesla's desire for their vehicle owners to no longer need to drive. In fact, Tesla plans to give owners the ability to send their cars out to work which would make them one of the largest ride share offerings pretty much overnight. Elon Musk recently noted that the ride-sharing service dubbed Robotaxi would likely be ready in 2020.

"I feel very confident predicting that there will be autonomous robotaxis from Tesla next year — not in all jurisdictions because we won’t have regulatory approval everywhere" - Elon Musk

How Does Tesla Look Today?

Tesla is priced, as it should be, like a high-growth stock. Their founder and CEO Elon Musk is a cultural phenomenon, and their cars are coveted by many. So, by almost every metric, the company is overvalued. And that's no matter if you throw it in with transportation or technology.

Let's take a look at some notable metrics:

Metric Value
Revenue Growth (YoY) 39.36%
EBITDA Growth (YoY) 253.57%
EV/EBITDA (NYSE:TTM) 41.58
Price / Book (TTM) 13.2
Price / Sales (TTM) 3.18

For someone who tends to invest in value, like myself, those middle two values (EV/EBITDA and Price/Book) are quite the scare. Those growth values though, they're things of beauty.

Full self-driving vehicles, even today, are a long-shot. Sure, companies like Waymo (via Alphabet) and Uber are already operating in some regions, but no company has released a fully autonomous vehicle nationwide. So, why Tesla? Well, given the vast amounts of data they have, and the more than five-hundred thousand cars on the road with the required hardware, they certainly stand out from the pack.

According to Tesla's own sales documentation, the final pieces of full self-driving will be delivered this year. The vehicles can already drive on highways (including passing), self-park and summon (come find you in a parking lot). 2020 features will allow vehicles to "recognize and respond to traffic lights and stop signs" and offer "automatic driving on city streets."

We should however pause for a moment here to acknowledge CEO Elon Musk's history of aggressive timelines on almost anything Tesla does. It's a problem he recognizes, but it's not something that bodes well for timid investment portfolios.

Despite the timing issues though, the company almost always seems to follow through. Delivery of the Model 3 at a reasonable price point was considered a pipe dream five years ago at the unveiling. Today, it's the best selling luxury car in America.

With a massive market to tackle, and a half-million car head-start over competitors, Tesla is well situated for delivery of full self-driving. If we assume a TAM in 2030 of $500B (transportation of goods and people using autonomous vehicles) and that Tesla could bite off 10% of this market (via RoboTaxi and an FSD enhancement to Semi) then they're looking at $50B in additional revenues in 2030.

Such an increase, along with Tesla's manufacturing of vehicles, solar energy products, and other battery product sales would more than justify Tesla's value today.

Esports

If you're looking for a fast-growing market that is sure to sustain growth through the decade, Esports has you covered.

Image: eSports market revenue worldwide from 2012 to 2022 via Statista

Like self-driving vehicles, the Esports market is playable from a number of different angles. There's the game developers such as Activision Blizzard (ATVI) or Electronic Arts (EA), hardware players such as Turtle Beach (HEAR), and a slew of media plays being led by Alphabet via YouTube and Amazon (AMZN) via Twitch.

These companies all partake in the Esports ecosystem, which itself is projected to grow to $1.5B by 2023. That value is the Esports portion ONLY. The companies listed still sell their games to customers, and they stream non-Esports events online.

My pick in the Esports segment for the decade is Activision. Activision, which also owns Blizzard, houses under its umbrella several prominent brands including Call of Duty, StartCraft, Diablo, Overwatch, and Warcraft. Several of their brands are prominent in the Esports community and regularly hold tournaments around the world.

Image: List of Activision Blizzard titles

Of course, the gaming market is hard to predict. In recent years, titles like Epic Games' Fortnite have come along and risen to the top of the pile. This type of thing could knock Activision down a few pegs in the future, but I'd argue that the franchises listed above are mainstays in the gaming community with legions of dedicated fans. In fact, the most recent Call of Duty is the most played multiplayer game on consoles this generation, so their brands are still alive and well.

With new consoles coming in 2020, and a new Overwatch game promised, Activision have a clear path over the next few years. As Esports continues to grow, the company will have further options to monetize their brand, which will lead to great returns for investors.

How Does Activision Look Today?

Activision hasn't had the best few years, but they are making a comeback. Just look at this 3yr chart of the equity price. The beat-down occurred due to Activision's inability to quickly and effectively counter games like Fortnite, but as we've seen with the new Call of Duty (no costly DLC and micro-transactions in game) that is changing.

ChartData by YCharts

On an annualized basis, revenues and gross profit have continued to grow, albeit at a slightly slower pace over the last two years. For the first three quarters of their most recent year, revenues have been down when looking at the prior year. With massive sales for Call of Duty, it would seem like that the next earnings report will push them back into slight (1-2%) revenues growth YoY.

So what will it take for Activision to break out of their currently stagnating path? Well, future releases such as Overwatch 2 will continue to move the Esports needle. Franchises that play in the current Overwatch league sell for $30-60m and the league itself has done close to $150m in sponsorships and broadcasting deals.

Alongside Overwatch 2, Activision is jumping into the mobile game space in a big way with Call of Duty Mobile, a free to play that has been downloaded more than 172 million times, generating $87M in the first two months according to SensorTower. These types of mobile tie-ins with big franchises stand to give Activision a big boost in the years ahead with Esports being a big ol' cherry on top.

Home Buying

Home buying is changing, and over the next decade I believe it will be the industry most affected by technology. Zillow (Z) and Redfin (RDFN) are two publicly traded companies that will benefit massively from this change in consumer behavior.

Image: Redfin Now sales process

If you haven't sold a home for a while, there's now a few ways to get things done. You could list your home the traditional way which likely comes with a 4-6% cut off the top for the realtors. Or, you could take the non-traditional route by selling to a company like Zillow, Redfin, or private competitors like Opendoor. If your home is of interest, they send someone out to make sure the walls and the roof are all there and then make an offer (note: the process differs from company to company). The company then turns the home around and puts it on the market.

Out of Redfin and Zillow, I like the way Redfin is going about things a little more. See, as a company, they offer customers several ways to buy (buy traditional or buy direct with no buy side realtor) and sell homes (they use their own reduced fee brokers, or they'll buy the home from you in some markets). Outside of buying and selling, Redfin also offer mortgages, and title services. They truly are the entire package.

Buying to flip homes is no doubt a risky proposition. Should the market take a turn for the worst, that asset could sit on the books for a while (and incur property taxes along the way). It's also a relatively low margin business with profit being the Sale Price - Purchase Price + Fees (fees run 7% for Redfin). By offering all services in house, and offering the traditional buying/selling route, Redfin are well positioned no matter where the market might go.

How Does Redfin Look Today?

They're one of the most recognized names in the online real estate game and have been growing top-line revenue at a healthy pace for the last several years. It's worth noting up front that the company is running in the red and has not generated a net-profit on an annualized basis thus far.

One major recent change to Redfin's pricing structure may however be a catalyst for change leading into the decade. Redfin originally charged a 1% sale fee on a property (much lower than the 3% from traditional brokerages), but this has now changed to 1.5% with a 0.5% rebate should the seller then use Redfin to purchase their next home.

At 1.5%, even customers who do not wish to use a Redfin agent to buy are still paying roughly half of what they would with a traditional brokerage. The ability to get that 0.5% rebate would likely balance out any losses Redfin might see by increasing prices. With estimated listing revenues of $160M in 2019, SeekingAlpha author Undiscovered Investments believes revenues will jump by almost $80M in 2020.

These additional revenues should allow the company to reach profitability. Something that analysts do not believe is on the table before 2023. A massive cash boost would also allow Redfin to play the direct purchase game in more cities to see if it really is the future of real estate.

In Closing...

Making predictions over a decade is a difficult undertaking. However, these companies are all well situated in their respective markets today and have bright futures. I would love to hear of reader's 2020 predictions or companies to watch in the comments section of this article.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.