How eBay Made '30x' While Investors Just Watched
Editor's note: An early investment in the right company can go a long way...
Many people tend to chase profits by investing in megacap companies. The problem is, these companies are simply too large to create sizeable gains. But investing in a tiny company on the verge of exploding can lead to life-changing wealth...
That's why Rob Spivey, director of research at our corporate affiliate Altimetry, stresses the importance of finding small companies with plenty of room to grow. According to Rob, this strategy can help compound your wealth. And he has seen this play out before...
In today's Masters Series, originally from the June 15 issue of the free Altimetry Daily Authority e-letter, Rob details how an e-commerce company earned massive returns by investing in a tiny startup... explains the advantages of getting in early on small companies... and reveals which kind of stocks you should look for when applying this strategy...
How eBay Made '30x' While Investors Just Watched
Sometimes, it's hard to remember life without PayPal (PYPL)...
The online-payments giant is valued at more than $85 billion today. And it handled more than 19 billion transactions last year, worth more than $1.2 trillion.
But the thing is... PayPal had to start somewhere.
It's amazing to think e-commerce giant eBay (EBAY) bought PayPal for just $1.5 billion in 2002...
PayPal was just a small money-transfer service back then. It was actually a side business of online bank Confinity and the brainchild of venture capitalist Peter Thiel.
That is, until our favorite entrepreneur stepped in...
We've talked a lot about Elon Musk recently. We've discussed both his pending acquisition of social media giant Twitter (TWTR) and his biggest success, electric-car maker Tesla (TSLA).
But many folks forget that Musk also used to own 12% of PayPal...
Thiel's Confinity merged with Musk's X.com in March 2000. The combined company rebranded as PayPal. Musk became the company's CEO and its top shareholder.
Then, when eBay bought PayPal two years later, Musk netted $176 million. He had invested $12 million to launch X.com. So in the end, his total return equaled more than 1,300%.
PayPal stayed private until 2015, when eBay spun it out at a $46 billion valuation. In other words, eBay did even better than Musk... It made 30 times its initial investment.
In 2015, PayPal's stock opened at $34.69 per share. And it closed yesterday at $71.23 per share – a roughly 105% gain.
That's a solid return in about seven years. But it isn't 1,300% or 2,900%.
As you can see, Musk's return in PayPal's early days dwarfed recent investors' returns by almost 10 times. That type of outperformance shows us why it's important to get in early.
These days, PayPal continues to innovate and grow. It now operates money-transfer brands like Venmo, Xoom, Honey, and Zettle. And it has added features like "Buy Now, Pay Later."
With that in mind, let's use the Altimeter to look at PayPal's performance...
The Altimeter is easy to use. It provides users with basic grades to help them rank stocks on their real financials – without the financial "noise" that comes with generally accepted accounting principles ("GAAP"). And today, we can see how PayPal is performing...
PayPal is firmly in the middle of the e-commerce boom. That's a big reason why the company earns a "B" for its performance. It produces high-quality, stable returns.
More specifically, the company's strong 25% Uniform return on assets ("ROA") earns a "B" for Earning Power. And its Earning Power Trend is a "C" today. That factor within the Altimeter tracks a company's year-over-year earnings growth. Take a look...
As PayPal grew from a tiny startup to an online-payments titan, public investors missed most of the big gains. Instead, insiders like Musk and the executives at eBay enjoyed the biggest upside.
Now, the company's market cap is greater than $85 billion. And in order to match Musk's 1,300% return, investors would need its value to soar to roughly $1.1 trillion. That would be larger than Amazon (AMZN) or Tesla.
In short, for the biggest upside, you need to get in at the ground floor...
And if you want the best chance to find companies like that, you need to look at microcaps.
PayPal's 150% return for investors since 2015 is impressive. But it's not a transformative type of return. At Altimetry, we want to help our subscribers uncover those types of gains.
Take graphics-chip maker Nvidia (NVDA), for example...
Nvidia was valued at around $230 million in January 1999. Today, it's worth around $396 billion.
To keep its individual share price affordable, Nvidia has issued five stock splits since its initial public offering ("IPO") – including a 4-to-1 split last July. But still, if you had invested in Nvidia when it first went public at $12 per share in 1999, you would be sitting on a whopping return of around 50,000% right now.
Intuitive Surgical (ISRG) is another example. Less than 20 years ago, the robotic-surgery company's market cap was around $120 million. But now, it's a $70 billion company. And its earliest investors could've made nearly 11,000% in that span.
It's next to impossible to see those kinds of returns from megacaps. They're just too large.
That's why we spend so much time hunting for microcaps. Specifically, we look for public companies worth less than $1 billion.
We're looking for businesses like PayPal, Nvidia, or Intuitive Surgical before they become PayPal, Nvidia, and Intuitive Surgical.
They're the types of opportunities that can turn 100 shares for $1,200 into more than $1 million.
Regards,
Rob Spivey
Editor's note: Rob and the rest of our friends at Altimetry have just identified one especially intriguing microcap stock... And they just released a brand-new research report on this company for their Microcap Confidential subscribers.
It's one of their favorite tiny companies. Most people aren't paying it much attention... but one of the greatest investors of the past four decades is taking notice today. Right now, you can claim instant access to this research – and a full year of everything else they publish at Microcap Confidential – for 50% off the regular price. Get all the details right here.