Table of Contents
Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.
The fundamentals of a company remain the cornerstone of any long-term investment strategy. However, certain milestones can act as powerful catalysts for stock price surges. Achieving these milestones often signals to the market that the company is scaling effectively, executing well, and achieving success that validates its business model. Including such companies in your portfolio can amplify your gains, but their absence should not necessarily be seen as detrimental to a company's fundamental evaluation.
It is important to note that these milestones should only be considered as merit bonuses under two conditions:
(i) The company is not overvalued (e.g., its PS ratio should ideally remain within a multiple of 18x; otherwise, the milestones may already be priced into the stock).
(ii) The underlying fundamentals of the company must be robust.
Below are four key milestones that have historically driven significant stock price increases, along with real-world examples to illustrate their impact:
1. Achieving the First Billion-Dollar Revenue
Reaching $1 billion in annual revenue is a testament to a company’s ability to scale operations and capture significant market share. This milestone reassures investors of its growth trajectory and revenue-generating capacity.
Examples:
Potential Upcoming Candidates:
SPS Commerce: With $612 million TTM revenue, a 15% annual growth rate over the next four years will help it reach $1 billion.
Duolingo: Currently at $689 million TTM revenue. If it achieves a 21% annual growth rate over the next two years, it will cross $1 billion in revenue.
However, investors should approach with caution as Duolingo's current PS ratio of 21x (24x if it returns to its all-time high of $378/share) suggests that expectations of hitting this milestone may already be priced in.
2. Becoming Profitable After Years of Losses
For companies that have focused on growth while operating at a loss, achieving profitability often triggers significant stock price appreciation. Sustained profitability signals operational efficiency and long-term viability.
Examples:
MercadoLibre (MELI): Reached profitability in Q3 2021 (source). Over the next two years, its stock price increased by 125%.
Tesla: Became profitable in Q2 2020 (source). Over the next 1.3 years, its stock price rose by 430%, driving the PS ratio of the stock to as high as 26X (source) before the stock price fall by end of 2021.
Potential Upcoming Candidates:
Spotify: On track for its first profitable year in 2024 after operating at a loss since 2016.
HubSpot: Though still operating at a loss, its profitability ratios show an upward trend.
However, investors should approach with caution as HubSpot’s current PS ratio of 14x (17x if it returns to its all-time high of $841/share) suggests that expectations of profitability may already be priced in.
3. Achieving the First Billion-Dollar Income
Reaching $1 billion in net income signifies a company’s ability to generate substantial profitability, cementing its status as a scalable business and strengthening investor confidence.
Examples:
Fortinet: Reached $1 billion in net income in Q2 2023 (source), with its stock price increasing by 73% in the following 1.3 years.
Netflix: Achieved $1 billion in net income in Q3 2018 (source), with a 67% stock price increase over the next two years.
Tesla: Reached $1 billion in net income in Q1 2021 (source). Within seven months, its stock price grew by 84%, driving the PS ratio of the stock to as high as 26X (source) before the stock price fall by end of 2021.
Potential Upcoming Candidates:
Spotify: With a TTM income of $729 million, a 17.5% annual growth rate for the next two years could bring it to $1 billion.
Interactive Brokers (IBKR): With a TTM income of $698 million, a 20% annual growth rate over the next two years could push it past $1 billion.
4. Achieving a $1 Trillion Market Cap
Crossing the $1 trillion market capitalization threshold signifies dominance and global influence. It often attracts significant investor attention and drives further stock appreciation.
Examples:
NVIDIA: Crossed the $1 trillion mark in June 2023 (source), with its stock rising 257% over the following 1.6 year.
Apple: Became the first U.S. company to hit a $1 trillion market cap in August 2018 (source), with its stock rising 56% over the following 1.5 year.
Microsoft: Reached $1 trillion in market cap in April 2019 (source), with a 70% stock price increase over the following 1.5 year, driven by its success in cloud computing.
Potential Upcoming Candidates:
Netflix: Currently at a $379 billion market cap. Assuming a consistent 15% annual stock price increase, it would take seven years to reach $1 trillion. However, due to the long timeline and unpredictable factors, this milestone requires reassessment in the future.
Bonus Milestone: Achieving 1 Billion Users
Crossing the 1 billion user mark is an extraordinary achievement, reflecting global adoption and dominance. Few companies—such as Facebook, YouTube, Apple (iPhone users), and WhatsApp—have reached this level.
Why It Matters:
Global Penetration: Indicates worldwide presence across diverse geographies and demographics.
Network Effects: The larger the user base, the more value the platform provides, attracting even more users.
Revenue Potential: Enables higher revenue from subscriptions, advertising, and partnerships.
Competitive Moat: Establishes dominance, making it difficult for competitors to challenge.
Spotify’s Journey:
Spotify, with a 27% CAGR in Monthly Active Users (MAUs) since 2015, has reached 640 million users in 2024 (source). At this pace, crossing the 1 billion user mark appears attainable, solidifying its position as one of the world’s largest platforms.
Final Thoughts
Market milestones offer valuable insights into a company’s growth and potential stock price appreciation. However, they should be considered as supplementary to a strong fundamental evaluation.
It is important to note however, a company’s absence from these milestones does not negate its potential for long-term returns.
By understanding the dynamics of these milestones and their historical impact, investors can make informed decisions that align with their financial goals while mitigating risks of overvaluation or weak fundamentals.
✅ Invest with Confidence, create your own Checklists in IceT.club
Comments