We live in a world where it is common for companies to tout market caps in the hundreds of billions of dollars. And with the digital economy poised to continue to grow at a rapid pace over the next decade, the $ 1 trillion valuation club is within reach for many of these organizations.
However, some of the best ROIs can come from much smaller companies that are on track to potentially hit the $ 100 billion mark in the future. Three that could get there in the next 10 years are DigitalOcean Holdings (NYSE: DOCN), Dynatrace (NYSE: DT), and SVB Financial Group (NASDAQ: SIVB). Here’s why all three deserve your attention now.
1. DigitalOcean: Basic cloud services for underserved developers
DigitalOcean is a public cloud infrastructure company that enables developers to build and deploy applications and services. Seems familiar? Three of the largest companies the world has ever seen specialize in this area of public cloud: Microsoft via its Azure platform, Amazonis AWS, and Alphabetis Google Cloud.
Confronting such titans will be no small feat, but DigitalOcean is thriving so far. How? ‘Or’ What? It focuses on individual developers, start-ups and small businesses – an underserved segment of the IT world, as tech giants can often generate the most growth and profit by focusing on serving large companies. . Underserved doesn’t mean DigitalOcean’s target market is small, however. On the contrary, the company cited research from IDC which shows that some $ 44 billion was spent by small and midsize businesses on cloud infrastructure services last year alone. This figure is expected to reach nearly $ 120 billion over the next three years.
DigitalOcean is already experiencing strong growth. Annualized recurring revenue (ARR) grew 36% year-over-year in the second quarter of 2021 to $ 426 million, and given the large and growing market in which it participates, the company believes it will has a clear path to reach $ 1 billion in ARR over the next few years. . But even once there, DigitalOcean will dominate only a small part of the small and medium business cloud computing industry. I expect it to continue to grow beyond the ARR $ 1 billion mark.
Of course, to maintain its momentum, DigitalOcean will need to add more features to its platform. But it already does, as with its recent acquisition of small cloud infrastructure technologist Nimbella. Its goal is to bring the same level of technological sophistication to its small developer user base that is available on large public cloud platforms. The fact that this business is already profitable certainly contributes to this expansion effort.
It’s still early days for DigitalOcean, but it’s gaining momentum. With a current market cap of just $ 8.6 billion, this could be a huge winner in the decade to come.
2. Dynatrace: We’ve made the transition to the cloud, what now?
The migration to cloud-based operations was already underway before 2020, but the pandemic has forced many organizations around the world to step up their operations on this front. But once this cloud transformation is complete, large organizations – and the massive amount of data they bring with them – need help managing their new 21st century IT infrastructure.
This is where Dynatrace comes in. The software platform has focused on the world’s largest businesses and organizations, helping them monitor, secure and repair their cloud operations using analytics and machine learning to automate the process. It has also gradually added new modules to its service center, so it’s not just a story of acquiring new customers – existing users continue to increase their spending with Dynatrace. The net dollar expansion rate exceeded 120% in the last quarter, meaning existing customers spent at least 20% more than a year ago.
As a result, Dyntrace’s momentum has strengthened. He expects the ARR to reach at least $ 984 million by the end of its current fiscal year (which ends in March 2022), which represents growth of at least 27% of a year over year. Dynatrace is also very profitable, generating a very healthy free cash flow profit margin of almost 39% in the last quarter. This provides a constant flow of fresh capital from which the business can market, develop new product features, and make acquisitions (such as the recent takeover of high-speed newspaper analysis software company SpectX).
Dynatrace hasn’t gone unnoticed, and stock prices have risen nearly 200% in the past 12 months alone. Nonetheless, the company’s market capitalization currently stands at $ 20 billion. With hundreds of billions of dollars spent on cloud infrastructure around the world each year and hundreds of billions more on the way over the next decade, there is still a lot to like about this small business’s prospects.
3. SVB Financial: who will bank all these new successes?
At first glance, SVB Financial – a bank stock by all accounts – is a significant departure from the previous two tech names. But it really is not. The company, better known as Silicon Valley Bank, is a major banker in what it calls “the innovation economy.” From tech start-ups to their venture capitalists, Silicon Valley Bank serves a particular niche in the financial industry.
To be fair, this is a boring business model that derives the majority of its income from interest on deposits and fees. However, as technology continues to break into the global economy and more start-ups shift from speculative betting to viable businesses, the deposits they hold at SVB have also steadily increased. In addition, as part of the financing that it concludes with its customers, this bank is often found in the capital of its customers. If a business takes off, it can generate big deals for SVB.
The company is also gaining momentum in wealth management with its recent acquisition of Boston Private. This gives SVB a powerful way to harness the success of the innovators it does business with and could build on the company’s long track record of profitable growth. Earnings per share have grown more than 790% over the past decade, including a tripling of year-over-year earnings in the first half of 2021 as the bank cushioned the effects of the pandemic and moved on. from the powerful turn to a more digital world.
With a market cap of $ 39 billion at the time of this writing, SVB Financial is already on track to hit the $ 100 billion valuation mark. But with the rise of his tech-driven clients, this banker has a lot more room to increase his performance over the next 10 years and beyond.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.