Mike Kwatinetz is a Founding General Partner at Azure Capital Partners and a Venture Capitalist investing in application software (SaaS), ecommerce, consumer web and infrastructure technology companies. Successful exits include: Bill Me Later, VMware, TripIt and Top Tier.
In days of old (pre 2002 or so) public companies did not provide specific guidance on what the next quarter’s revenue and earnings would be, let alone for a full year. Instead, they would point out a variety of points for analysts to think about in updating their models for the company’s performance, like:
The new version of Product X is due out in 3 months so this may lower near-term purchases
Our backlog is building, and we now have the ability to increase supply
Channel inventory is higher than normal
Recall in the last new chip cycle gross margin increased over time
At the time the expectation was that each analyst would create their own model of the company’s financials and therefore there would be a wide range of forecasts. Additionally, a company CFO could chat with individual analysts pointing out particular public disclosures the analyst might not have considered in their model. As a result, when the company reported, some analyst forecasts of revenue and earnings might be higher than the reported numbers and others might have been lower. This method of how the Street worked tended to reduce the magnitude of how the company’s stock reacted when earnings were announced.
Today, virtually every company we follow gives pretty specific revenue and earnings guidance. For example, here’s the guidance CrowdStrike gave on their Q1 FY 2026 earnings call:
Revenue Guidance
Q2: $1,144.7M to $1,151.6M
FY 26: $4,743.5M to $4,805.5M
Non-GAAP Income from Operations
Q2: $226.9M to $233.1M
FY 26: $970.8M to $1,010.8M
Non-GAAP net income per share
Q2: $0.82 to $0.84
FY 26: $3.44 to $3.56
Notice the revenue guidance range for the quarter is roughly 0.6% and for the full fiscal year is about 1.3%. The guidance for earnings has a range of about 2 ½% for the quarter and 3 ½% for the full year. Currently (nearly 2 months after this guidance was given), the consensus estimate for earnings is $0.83, exactly in the middle of guidance and the high estimate is one cent above the guidance range, the low 2 cents below. For prospective, for the past 4 quarters the company’s reported EPS averaged over 13% above consensus.
Rules that have compelled most companies to offer specific guidance have essentially put the Company in the business of predicting its own results. As is evident with Crwd, analyst Consensus revenue and earnings forecasts are now usually within or close to the range the company has guided to. It also has led to very wide stock fluctuations post the earnings call if the actual number is even slightly outside the range (especially if it is below the range) or if the new guidance for the next quarter is reduced even slightly. The penalty for missing guidance has motivated most companies to be conservative in the guidance they provide. But to be clear, high growth companies that are not subscription based do not have the same degree of clarity regarding future revenue and earnings that Crwd does.
There is also a penalty for being too conservative in providing guidance. Yesterday Amazon reported Q2 earnings. There quarter was a blowout with revenue nearly 4% above consensus expectations (meaning revenue growth was over 13% as opposed to the 9% expected) and earnings a full 28% above consensus. The company also raised revenue guidance from where Analyst consensus was. But Amazon was cautious on earnings as they were unsure of the impact of President Trump’s tariffs. The following day the stock was down nearly 10%.
When I first became a Wall Street sell-side analyst I thought a company should be able to accurately predict its own results. After all they knew more than anyone about what was happening in their company. But I soon learned there are many unpredictable factors every quarter which meant that most companies, especially high growth ones, don’t actually know precisely what will happen in the next quarter, let alone the full year. For example, when I covered Microsoft in the 1990s, I was the first Analyst to understand the impact of selling product upgrades and as a result my initial forecast of Microsoft earnings was over 30% above the Street average even after I made all my assumptions as conservative as I thought possible (my original estimate was over 40% above consensus). At the time I don’t think the company realized the magnitude of the upgrade cycle as it was the first one where the install-base was large enough to meaningfully impact revenue and earnings. Fortunately for me, my forecast not only proved correct and the company actually achieved my original estimate.
Currently, there are many issues that are somewhat unpredictable due to the difficulty in knowing where Tariffs will eventually wind up, if and when The Fed will modify interest rates, the emergence of AI, multiple international wars, potential trade issues, and more. Some questions various companies must address are:
Will consumer spending start to drop leading to lower sales?
Will important new products be ready on schedule?
Will the rush towards AI continue creating enormous demand for associated chips, storage, AI based application software, data center demand and more? Already, Nvidia has seen enormous growth due to its current leadership in GPUs and AI systems.
Will self-driving cars become the dominant form of transportation, especially for taxi services like Uber, Lyft, Waymo and Tesla?
Will inflation abate leading to lower interest rates?
Will the Israeli Hamas war end in a peaceful solution?
Will the Russian Ukraine war end soon?
Will the economy go into a recession?
Will Covid or some other major new virus shut things down again?
The answers to each of these questions can have a major impact on numerous companies.
The Extreme: Impact of Covid
The impact of Covid in 2020 meant brick and mortar stores either shut down completely or had a dramatic drop in sales. This in turn caused numerous bankruptcies. At the same time online sellers like Amazon and Shopify saw an unheard-of previously unpredictable surge in sales. Shopify grew revenue 47% in 2019 and in “normal times” would have been expected to have lower growth in 2020. Instead, the “Covid Effect” caused growth to soar to almost 88% 2020 and was over 100% in the peak quarter. Amazon saw a similar surge as its growth rate jumped from 20% in 2019 to 38% in 2020.
Zoom and DocuSign also saw revenue growth soar in 2020.
Several drug companies became suppliers of vaccines causing well above normal revenue growth for them.
Should there be another virus issue causing people to shun going to brick and mortar stores there would once again be a shift in revenue towards online sellers.
Other Deus Ex Machina: Russian and Hamas Invasions
While not as extreme as the impact of Covid, each war led to numerous shifts in revenue.
Most obviously, arms company suppliers saw a substantial revenue benefit.
Sales of consumer goods in Europe, especially Germany dropped
Logistics was impacted
Loss of supply of goods from the Ukraine and Russia effected prices of many commodities which in turn fueled inflation
More ordinary day to day unpredictable issues
There are issues for every company that can impact their results. A few examples for companies we are invested in:
A new computer virus that is hard to protect against could cause a surge in adoption for next gen Cyber Security companies like CrowdStrike and Sentinel One leading to above guidance revenue gains.
An unexpected outage can impact revenue and earnings – which occurred for CrowdStrike in 2024.
A significant increase in import duties for Chinese manufacturers of Electronic cars could help Tesla and Rivian revenue.
A drop in interest rates by the Fed could spur home sales and also improve earnings for companies with significant debt. An increase in the volume of home sales would likely cause a large increase in furniture sales.
A drop in interest rates could result in increased consumer spending helping companies like Amazon, Shopify, Walmart, consumer goods suppliers and more exceed expectations,
Further delay in dropping interest rates could have the opposite effect causing substantial decline in consumer spending.
An unexpected shortage of parts could cause a company to be unable to produce the number of units it anticipated manufacturing.
As a VC I have been on the boards of private companies and watched them attempt to forecast results by quarter for the current year and the following one. The actual revenue numbers for the next quarter are often off by over 10% and actual EBITDA is often off by 20% or more. When the company exceeds a revenue forecast in a quarter, they are loath to raise their forecast for the following quarter. If we assume a public (growth) company has some of the same problems, then their very specific guidance for revenue will often turn out to err by 10% or more. Yet even a minor miss can cause the stock to drop by 10% or more the next day!
Why Subscription Based Companies have Better Predictability
Subscription-based companies are a relative exception regarding predictability of the next quarter’s revenue and earnings. Using CrowdStrike as our example, the company held its Q1 FY 2026 conference call on June 3 (just over one month into its second quarter). They disclosed that their subscription ARR at the end of Q1 was $4.44 billion or $1.11 billion per quarter. They signed $194 million in new ARR during Q1. Or about $65M per month. Let’s assume they only signed 60M in May 2025 (before they reported Q1) and that they could recognize 2 ½ months of that in Q2 or over $12M. That would mean that without signing any new subscription business later in the current quarter they would already have $1,123M in subscription revenue known to them and would need $22M more in revenue between additional subscription signings and service revenue to reach the low end of their guidance for Q2 ($1,145M). Since the company recognized over $50M in services revenue in Q1, services alone appears likely to provide enough to get them to the high end of the guidance range without booking any more ARR in June or July. Of course, they will sign more customers during June and July (the remainder of their quarter). It’s easy to see that the company guidance was conservative. And not surprising that Crwd has posted earnings that was an average of 13% higher than consensus estimates over the past 4 quarters.
Automated Trading Exacerbates Volatility
While we believe that providing specific guidance is a significant factor in creating volatility, automated trading tends to be another factor. If automated trading programs react in a similar way to market movement, then large volumes of trades get created that increase the directional momentum of the stock. In essence, this can mean stocks tend to over-react to a small revenue or earnings miss. That is why it is often the case that a large drop (or increase) in the stock price one day is followed by a movement in the opposite direction the next one.
Ergo: The Conundrum
When a high-growth company provides guidance for the year it needs to choose how conservative to be. If it is too conservative and provides guidance that doesn’t show a high enough revenue growth rate to please Analysts, its stock can plunge. Our above discussion of Amazon is a good example. Lowering earnings guidance caused havoc with the stock despite exceptional performance in the reported quarter. Amazon has a history of consistently beating earnings numbers so I’m guessing they did this because of the uncertainty regarding tariffs. I expect the company to outperform the current guidance (and even the prior one). But had they not done this, Analysts would have increased estimates and made it harder for the company to beat numbers potentially causing a future problem for their stock.
Soundbytes
Silly software design bothers me, especially when it wastes my time. There are many examples, but I want to point out a few in Microsoft Office email as I am on it quite a bit and so every area of poor design affects my efficiency.
When I open an email with an attachment and then open the attachment, the email then goes into an “open” queue. If I delete the email subsequently it still stays in the queue (it should delete it there as well but doesn’t). Then when I’m going through the queue of previously open emails, I ask it to be deleted. I get a message that it already was deleted, and it stays in the queue. I then need to close it to get rid of it. This adds several unnecessary steps to my process.
Attachments to an email are often in “protected view”. I can open them (which is where I think the most risk lies of it leading to a virus) but can’t save or print it without an extra step to take it out of protected view.
Google now has an AI statement in response to many searches. But the way they train the AI relies on very recent past and the answer it often provides is incorrect.
Comments on the Warriors/Kuminga Stalemate
The Warriors have yet to resign Kuminga but have made a “Qualifying Offer” of $7.9 million dollars for the 2025-2026 season. By extending such an offer the Warriors now have a Right of First Refusal (ROFR) to sign him. What that means is he can go out as a free agent and negotiate a contract with any NBA team. If he does, the Warriors will have the right to match it and retain him on that contract.
This creates 4 possibilities:
Kuminga receives an offer from another team as a free agent and the Warriors have the opportunity to match it. So far this has not occurred because teams don’t have the available capacity to make a compelling offer.
The Warriors retain his services for one year under the qualifying offer and then Kuminga becomes an unrestricted free agent the following year
The Warriors and Kuminga agree on a new contract
The Warriors and Kuminga agree to a “sign and trade” where Kuminga is signed to a contract by the Warriors and simultaneously traded to another team.
While the sign and trade is Kuminga’s preferred solution, the offers to the Warriors as to what they will receive in such a deal have been insufficient to get them to agree. Instead, they reputedly offered Kuminga a 2-year contract for $45 million. It seems to me that if a sign and trade can’t be worked out this is something Kuminga should sign rather than taking the qualifying offer as it essentially pays him an incremental $37 million (more than he is likely to get per year as a free agent) for agreeing to a second year. Further, it is an amount that will make it easier to make a trade at mid-season if Kuminga is still unhappy.
To provide my top picks for 2025 on a somewhat timely basis I am combining my recap of the 2024 predictions with the new ones for 2025. Those who follow my blog for some time should not be surprised that I am picking the same 7 stocks that I did last year so the only change to my top 10 will be to the 3 non-stock specific forecasts. Just to remind you: I believe that the greatest wealth creation occurs through investing in well run companies that have a long-term sustainable advantage and then holding their stock for a number of years. Of course, holding the stock should not be automatic as it’s important to reconfirm that the advantage persists.
Performance of the 7 Stock picks made in 2024
As can be seen in Table 1, our picks for last year performed quite well with an average gain of 61.4%. Tesla became my third 100 bagger as my personal basis from originally investing (in 2013), adjusted for splits is now $3.06 per share (my former two 100 baggers were Dell and Microsoft some time ago).
Note: Nvidia stock price at the end of 2023 is adjusted for the 10 for 1 split during 2024.
While Nvidia performance was an outlier as it was up over 171%, 5 of the other 6 stocks recommended easily outperformed the S&P (which increased 25.0% last year) and the 6th, Data Dog appreciated 17.5%.
Accuracy of our 3 Non-Stock forecasts in 2024
Two of our three non-stock predictions proved valid but the third was not.
The first prediction was that other AI stocks would emerge (along with Nvidia) as winners in 2024. Several of these, like CrowdStrike and Tesla, were among our recommended stocks. But the poster child for AI software company performance in 2024 was Palantir which led the S&P in performance at an increase of over 340%.
The second prediction was that the Furniture Sector would stage a comeback in 2024, returning to growth. This did not occur. I was counting on a substantial decrease in interest rates, spurring a comeback in home sales as home buyers tend to spend quite a bit on buying furniture. Instead, home sales hit a 29 year low by falling 0.7% to 4.06 million homes purchased, the weakest result since 1995 according to the National Association of Realtors. This comes on the heels of poor results in 2023. While the Fed did eventually start dropping rates it occurred late in the year and was far less than expected at the beginning of 2024.
The third non-stock prediction was that advertising revenue would have a comeback in 2024. Advertising did come roaring back. According to GroupM, advertising revenue increased 9.5% to $1.04 trillion globally last year after only growing 5.8% in 2023. To put this in perspective, 9.5% is 1.64 times the prior year’s growth rate. Digital advertising continued to gain share as it increased 12.4%.
Summary of Accuracy of 2024 Top Ten Picks
Simply put, 9 of our 10 forecasts were correct as the 7 stock picks generated outsized performance and 2 of the 3 non-stock picks were accurate.
My 2025 predictions
As stated above we are continuing to recommend the same 7 stocks as our picks for 2025. You may wonder why I am continuing to recommend them after their stellar performance the past 2 years as the 6 of them (excluding Nvidia) I picked in 2023 appreciated an average of 96% that year. And Nvidia stock grew an even faster 239% in 2023. We’ll discuss each company individually but first I want to provide 2 tables that add some perspective.
The six stocks in Table 2 all had a very difficult year in 2022, so a three-year analysis is very revealing of where they stand relative to their price/revenue (P/R) ratio at the end of 2021. On average, the 6 have grown revenue nearly 130% from Q3 2021 to Q3 2024 yet the average stock has only appreciated a small fraction of that amount. This is due to the large stock price drops each experienced in 2022.
In Table 3, I’ve consolidated the comparison of share increase vs revenue increase. Other than Amazon (which has had spectacular earnings growth far exceeding revenue growth) none have experienced stock appreciation close to how much their revenue has grown. In fact, Data Dog and Shopify revenue are up 287% and 92%, respectively, in the 3-year period and both their stocks are down! In Shopify’s case the revenue increase is understated as the 2021 number includes Shopify Logistics which was sold to Flexport in 2023. I do not expect the companies to return to the P/R ratios they experienced in 2021 but do believe the current ratios still leave room for improvement as most of these companies have earnings appreciation well above revenue growth. And I expect all of them other than Amazon to continue to grow revenue over 20% annually going forward. With that, we’ll now move on to the top 10 for 2025. (Note: all begin share prices are the stock price at the end of 2024 as they are all continuing recommendations.)
2025 Stock Recommendations (Note: base prices are as of December 31, 2024)
Tesla will continue to outperform the market (it closed at $403.84/share)
Tesla is the most complex and most controversial of our recommendations, so we’ll devote far more space in this post to it than any of the other 6 stocks we’re recommending. While Tesla did appreciate over 60% in 2024, its stock is still only 15% higher than 3 years ago despite 83% higher revenue and new opportunities surfacing that could lead to another decade of substantial growth in revenue and even higher growth in earnings. But Tesla has numerous issues that cause the stock to be quite volatile.
The Cybertruck, which reputedly has a massive backlog, fell well short of expectations with slightly under 39 thousand units sold in 2024. It is expensive to manufacture and has very low (but positive) gross margins even on the higher priced models. Tesla needs to lower its manufacturing cost to be able to sell lower priced Cybertruck offerings profitably. If the company can, it could help add to volume in 2025.
Elon keeps causing concern amongst investors with his behavior. His recent addition to the Trump team can be viewed positively or negatively. It appears an obvious distraction but being on the inside could be positive for Tesla.
The growth in sales of BEVs (Battery Electric Vehicles which does not include Hybrids) seems to be slowing. We always expect high growth rates to decline over time but still believe unit sales of BEVs will grow over 20% per year for some time. However, this may be dependent on Tesla launching its low-cost model.
Competition is getting stronger, especially from the Chinese auto companies.
While we feel that the Cybertruck will likely not reach Elon’s previous optimistic predictions (selling 250,000 to 500,000 per year), we still believe it can add to 2025 unit growth as sales of this vehicle are incremental for growth so even selling half the low end of Elon’s expectation, 125,000 units would add 5% to Tesla’s 2025 unit growth rate (and more to its revenue growth rate). We’re guessing shipments will depend on the company being able to start selling lower-priced versions. The vehicle is so unique that it should also act as a draw for people to visit Tesla showrooms which will help sales of other models.
If Elon is a bit distracted that should not impact Tesla as its product road map is pretty well set for the next 3-5 years. If his comments cause a subset of people to decide not to buy a Tesla this may be offset by others (especially Trump supporters) liking them and considering the vehicle.
High growth rates almost always decline over time as a product scales. The growth in sales of BEVs cannot stay at the level it’s been at so it shouldn’t be a surprise that it is slowing. In 2022 BEV unit growth was about 60%, down from over 100% the year before. In 2023 it was close to 40%, still a very attractive rate. Because of high interest rates 2024 auto sales growth moderated across all vehicle categories but we expect it to reaccelerate if rates decline. Still, according to Rho Motion, worldwide sales of all electric vehicles (including Hybrids) grew 25% in 2024. The US growth rate was a much slower 9% but did reach over 16% in Q4.
The competition from Chinese manufacturers is getting stronger. But competition appears to be weakening from everyone else. Assuming the Trump administration does place significant duties on Chinese imported autos Tesla will be a primary beneficiary.
Analysts are predicting that Tesla will grow revenue by 15% -20% in 2025. We believe it could be higher if Tesla can get its low-priced vehicle in market by mid-year, improve sales of the Cybertruck, expand sales of the Semi, and successfully launch the Tesla taxi service in Q4. We’re guessing unit growth will be higher than revenue growth especially if the low-priced Tesla offering hits volume.
It’s important to understand that Tesla stock is being driven by its leadership position in AI. It could be the first to perfect autonomous self-driving. Doing so would enable it to be the leader in self-driving taxis (with much higher margins than autos) and to license the technology to others. Further, perfecting AI for robotics would open a very large new market for the company that could be a larger one than autos.
2. Shopify will outperform the market (it closed at $106.33 per share)
In our post of Top Ten predictions last year, we pointed out that the pandemic had created a major warping of Shop revenue growth. Instead of the normal decline for high growth companies from its 47% level in 2019 it jumped to 86% growth in 2020 and still was above “normal” at 57% in 2021. Once physical retail normalized in 2022, Shopify growth plunged against the elevated comps declining to a nadir of 16% in Q2, 2022. When we included Shop in our Top Ten for 2023, we pointed out that we expected its revenue growth to return to 20% or more throughout 2023 and 2024. This indeed did occur, and before Q4, 2024 results are announced the consensus Analyst forecast of Shop revenue growth for 2024 is about 25% and even higher for Q4. We expect the 20% – 30% growth rate to continue in 2025 as:
Net revenue retention for the company continues to be over 100% due to Shopify successfully expanding the services it provides to its eCommerce business customers. Additionally, because successful eCommerce companies are growing, Shopify also grows its portion of the customer revenue it shares.
Shopify has emerged as the number one alternative to Amazon and larger companies are now being added to its customer base.
Every six months Shop adds over 100 new features to its software, improving its products faster and more efficiently than all but the very largest of eCommerce players. Over time this has made its platform more attractive to larger merchants. Most recently Shopify is offering AI products that:
Help Optimize product descriptions to improve search results.
Optimize consumer search of a store for finding the right product match.
Create professional photos of products
Help optimize marketing campaigns.
Lower the cost of support using Chatbots from the Shopify store.
And much more.
Increasing the value of an AI application requires enough data for the AI to learn how to improve. Typically, the more data the better the solution can be. What this means is that those who own large pools of data have an advantage over those that are more limited. Because Shop is the solution for nearly 5 million online stores it has a massive pool of data to use to train its AI apps. Very few individual ecommerce sites have even a small fraction of this amount. So, in addition to benefiting from the development cost being spread over millions of Shopify customers, Shopify AI apps also are able to be trained using this data advantage.
We believe Shopify remains an undervalued stock as its price to revenue is still 60% lower than at the end of 2021. Shopify is also in its “sweet spot” for earnings expansion exceeding revenue growth. If it meets the current analyst consensus forecast for Q4, 2024 earnings will be up 73% from 2023. This seems likely as the company has consistently beat Analyst quarterly projections by 10% or more for a number of quarters in a row. We believe Shopify remains an undervalued stock
3. CrowdStrike will outperform the market (it closed 2024 at $342.16 per share)
The performance of CrowdStrike (CRWD) in Q3 was dominated by its July outage which stemmed from a software update that had an error in it. Unknowingly, the company used it to update about 8.5 million Windows devices around the world. The update caused the devices to crash, bringing down systems from airlines to banks to retail merchants. The company undid the update and gave customers a work-around to restore their systems but some customers suffered monetary damage. While it appears that the company will not be responsible for this damage, they likely needed to make some price concessions to customers. Analysts lowered their Q3 earnings estimates by nearly 20% to account for such concessions. And the stock plunged 42% in the two weeks that followed the outage.
Ironically, the outage demonstrated just how strong the Company’s position is in the market. While the outage reduced Q3 earnings to about 10% lower than Q2, it appears to have had little impact on customer retention, as CrowdStrike remains the gold standard for security, and we believe it unlikely that the long-term impact will be material. But, in the near term the outage has meant the company needed to offer some customers discounts which in turn impacted revenue growth and earnings. We believe the stock reflects this and that little has changed regarding CRWD’s long-term prospects. The stock recovered much (but not all) of the ground it lost after the outage and was up 34% in 2024. We expect the company to be much more careful in testing new releases before rolling them out in the future as a second outage might have a more dramatic impact.
CRWD has now rebranded itself as the “AI Native Security Platform” given its leadership in using AI to prevent breaches. The company continues to gain a substantial share of the data security market. Given its leadership position in the newest technology coupled with what is still just over 3% of its TAM, CRWD remains poised for continued high growth. This coupled with over 110% net revenue retention for 24 straight quarters makes CrowdStrike a likely long-term grower at over 25% per year as it recovers from outage discounts. High revenue retention is primarily driven by expanded module purchases where 66% of subscription customers now pay for 5 or more modules and over 20% for 8 or more.
4. Amazon will outperform the market (it closed 2024 at $219.39 per share)
Andy Jassy became Amazon CEO in the second half of 2021. After he was in the seat for about a year, we predicted that he would begin to focus more on earnings than Jeff Bezos had since there was ample opportunity for considerable EPS growth if Amazon decided to streamline spending. This has been occurring and in Q2 revenue increased by 10.9% but earnings grew by 94%. It continued in Q3 as a 12.4% revenue growth was accompanied by over 52% earnings growth. Analysts are forecasting revenue to be up about 11% for all of 2024 but earnings to grow over 77%. Given Amazon’s recent history of earnings coming in well above expectations we wouldn’t be surprised if Q4 (and 2024 earnings) proved higher than forecast. Which, in turn, would likely mean that 2025 earnings could increase over 30% (and we think it could be higher). Of course, this assumes consumer spending remains as solid as it has been in 2025.
While eCommerce drives the majority of Amazon revenue, AWS drives the majority of its operating income. In Q3 AWS was 17.3% of the company’s revenue but generated 60.0% of its operating income. The company has managed to keep AWS expenses close to flat through the first 3 quarters of 2024 so that the growth in revenue largely was converted to income. Going forward we expect AWS to continue to grow faster than the rest of the company and also continue to expand its operating margin. This is one reason that we expect Amazon earnings growth to be higher than revenue growth in 2025 and beyond.
There are additional opportunities on the revenue side for Amazon, especially in advertising and media purchasing. For example, Prime remains a distinct bargain as it not only includes free shipping but also other benefits such as video streaming of movies and TV shows, some free eBooks, discounts at Whole Foods and more. Amazon has been increasing advertising as well as adding charges for some content for its video streaming. Given that Prime has over 230 million members, a $20/year increase in monetization of content per user (which equates to about one extra movie or TV series purchased every 6 months) would add over $4.6 billion to revenue. Such an increase equates to almost $1 per share of earnings. I have noticed more emphasis on purchasing movies and TV shows in my own use. The company has meaningful AI technology that could lead to additional revenue. Amazon has also been trimming costs (as a percentage of revenue). It is this combination that drives expected earnings to grow faster than revenue in 2024 and again in 2025.
5. Data Dog will outperform the market (it closed 2024 at $142.89 per share)
Like many other high growth subscription-based software companies, Datadog (DDog) experienced another solid year in 2024 with revenue growth (with Q4 yet to be reported) forecast at 25% and EPS growth expected to be about 35%. Given the company’s recent history of exceeding forecasts, we believe EPS growth could be higher. Yet, while the company has grown revenue 287% since 2021 its stock is 20% lower than 3 years ago. This is even more striking when one considers that earnings have continued to grow at a much faster pace than revenue and 2024 earnings will be close to 9 times the result in 2021. Having said that, DDog still trades at a multiple of about 70X 2025 EPS. This is not particularly high for a subscription software company growing over 20%, especially one with a 100% revenue retention rate. So, while we don’t expect DDog to regain the PE multiple it once experienced, we do believe the combination of high earnings growth and a modest PE expansion could make it a strong performer in 2025.
6. The Trade desk (TTD) will outperform the market (it closed in 2024 at $117.53 per share)
Like all our 7 recommended stocks, The Trade Desk (TTD) is deploying AI to the benefit of its customers. Its product, Koa, uses AI to improve advertising campaigns. TTD points out that Koa not only improves an advertisers’ CPA (cost per customer acquisition) by an average of 34% but also helps easily scale successful campaigns. Industry advertising revenue growth was about 9.5% in 2024 a large improvement over 2023. Since the growth was helped by an easy compare coupled with added political spending (in a presidential election year) we expect the growth rate to moderate slightly in 2025.
TTD is the leader in the CTV (Connected TV) segment of advertising which has been gaining share in the space. Analysts are forecasting 27% revenue and 30% EPS growth for the company in 2024, but we expect Q4 results to exceed the forecast, helped by political spending. In 2025 the consensus Analyst forecast for TTD continues to show growth of both at over 20%. We expect the numbers to be even better as customer retention has consistently been over 95% for 10 years in a row. This combined with industry growth and TTD share gains makes us optimistic that the company will perform well.
7. Nvidia will outperform the market (it closed at 134.29 per share on December 31, 2024)
While it is still early, the first phase of the transformation to AI is well under way. There is a need for computers to transform from CPUs to GPUs to achieve the performance necessary to effectively utilize AI. A major reason for that is the massive amount of data that needs to be crunched for an AI app to learn what it needs.
Nvidia is one of the strongest ways to invest in the AI evolution. Its generative AI-optimized GPUs have a technology lead on its competition and are needed by companies moving to AI. The demand for such a product currently exceeds supply, giving the company several quarters of backlog. Because of the shortage of supply coupled with a superior product Nvidia has significant pricing power.
In Q3 the company’s revenue grew over 93% and earnings over 100%. Based on current earnings forecasts the stock is not expensive, trading at about 30X analyst earnings forecast for fiscal 2026 (year ending in January 2026). Given that we expect the company to exceed the analyst forecast, we believe Nvidia may be trading below the S&P multiple of what turns out to be actual earnings next fiscal year. For a company expected to grow revenue and earnings over 50% in FY 2026 this remains quite low.
Make no mistake, this will be a volatile stock given its startling growth coupled with historic risk associated with the semiconductor sector. One reason Nvidia’s multiple is lower than other entities with 20% plus growth rates is investors are concerned that chip cycles run their course and during the latter stages of each cycle demand falls and unit prices tumble. The question of whether current pricing can be maintained as stronger competition emerges is an overhang. AMD announced a competitive product to NVidia’s “Blackwell” next gen chip in Q4 and expects to start selling the product in late Q1. But, to put it in perspective relative to demand, Nvidia is expected to achieve close to $200 billion in revenue in FY 2026 while AMD GPU revenue is currently forecast at about $7 billion for calendar 2025. It seems unlikely that AMD will try to force down pricing in 2025.
It appears that the trend towards AI could continue to evolve for a decade or more before leveling off. Nvidia points out that company after company that is pursuing advanced AI software is shifting to GPUs where Nvidia has a significant early lead (with AMD in hot pursuit and Intel and others lagging). As Nvidia locks up customers they appear well positioned to retain them as long as they maintain a solid competitive position. And as the early leader, the company has secured a massive number of customers.
In general, the cost of manufacturing chips declines as a product matures so even if pricing declines, gross margins could remain close to where they currently are. Intel is also working on becoming a leader in AI. It has several products and numerous customers but appears to be several years behind Nvidia and AMD. The other strong competitive advantage that Nvidia maintains is the number of developers creating applications using its platform is about 4 million, dwarfing any competitor. This was the key for Microsoft Windows to win in the PC space and Apple to win in smart phones.
A second potential issue for Nvidia is sales to China comprised over 20% of its sales in Q3. The US government has restrictions on selling the most advanced technology to Chinese companies and Nvidia believes it has complied. Also it’s not clear what impact the Tariff policies of the Trump administration will have on Nvidia sales in China. In its guidance for Q4, the company stated that it expects the percent of sales to China to decline in Q4.
More worrisome news from China surfaced in late January – the possibility of a competitive AI software product that requires much less GPU power. Even if true, it could take some time for this to roll out but still is an additional threat.
For now, we believe Nvidia will continue its momentum throughout 2025 and beyond. Given that demand is growing rapidly (there are forecasts that 80% of all PC sales will be AI enabled in 4-5 years) pricing pressure that causes significant GM decline appears unlikely to emerge in the next 2-3 years. As we saw in the PC space (where Intel controlled things), as pricing on older chips declined, users tended to buy newer technology meaning that instead of paying less for the older product they paid what they had before for a more powerful product. It appears that the AI space is still young enough to replicate this trend.
2025 Non-Stock Predictions
The Housing market will experience increased unit sales in 2025
Am I a glutton for punishment or a patient forecaster? Last year I was counting on a substantial decrease in interest rates, spurring a comeback in home sales. Instead, as discussed above, home sales hit a 29 year low by falling 0.7% to 4.06 million homes purchased, the weakest result since 1995 according to the National Association of Realtors. This comes on the heels of terrible results in 2022 and 2023. While the Fed did eventually start dropping rates it occurred late in the year.
In the last year before interest rates ran up, 2021, 6.1 million homes were purchased. While it may be a while before we get back to that level, 3 years of sub-normal sales have created some pent-up demand. There are several issues that have been depressing sales:
Many existing homeowners have mortgages at low interest rates (2% – 4%). Selling their home to buy another would likely mean doubling the interest paid on their mortgage. This issue means that even owners that want to downsize might be looking at a higher carrying cost for a smaller home.
Resistance to giving up a lower rate mortgage means that the inventory of available homes is low which based on “supply/demand” economics leads to higher prices. The median price of a US home in Q3 2024 was nearly 25% higher than 4 years earlier.
When 25% higher prices is combined with average mortgage rates that were 6.75% for a 30-year mortgage in December, 2024 vs 3.38% in 2020, the cost of home ownership has skyrocketed.
So, why do we believe the number of homes sold in 2025 will increase? Partly because 3 years of falling sales have created substantial pent-up demand (along with base demand from people who move to a new geography or are first time home buyers). Also, because we expect the Fed to lower interest rates further in 2025, in turn causing mortgage rates to drop. We also believe that many owners who have resisted selling may reach the point where they need to sell, leading to increased inventory from the low levels early this year. And finally, because the comparison (last year’s unit sales) is already at a very depressed level which we believe is a bottom.
2. Trump tariffs will not be as high as expected
Whether one likes President Trump or not its important to recognize that he is a tough negotiator. The best negotiators do not start with a position close to where they would be satisfied. Tariffs is one weapon Trump will use to get agreements on a variety of issues. But, assuming the country he is negotiating with wants to reach an agreement, I believe it likely that higher tariffs either will not be imposed at all or if they are will be at lower levels than suggested in the press.
We have just seen an example of this in Trumps negotiations with Colombia. Trump wanted to export “illegals” that he believed were undesirable. When Colombia blocked their return, President Trump responded that tariffs on goods from that country would increase substantially as well as other retaliations. On Sunday evening (January 26) Colombia agreed to all of President Trump’s terms, “including acceptance” of immigrants who entered the US illegally. The White House then backed off on the threatened Tariffs and other sanctions.
3. Relocation from high tax states like California and New York to low or no tax states like Florida and Texas will continue.
The discrepancy in state taxes between places like California and New York vs no tax states increased substantially in the first Trump administration when a new tax initiative passed that essentially eliminated deductions for state taxes from federal returns for upper middle class and higher income taxpayers. Prior to that, the net cost of state taxes was reduced by being able to take them as a deduction on one’s federal return. Now the California top bracket 0f 13.3% means high income taxpayers there pay over 50% of the portion of their earnings that reaches the top bracket. Moving to a state like Texas or Florida reduces their top bracket to 37% as neither of those states (plus several others) have a state income tax.
Taxes are only part of the high cost of living in California. Overall (according to U.S. News and World Report) the cost of living in California is 38% higher than the national average. Housing is 97% higher and utility cost is 24% above the national average. Living in New York City, while not quite as expensive, is still 26% above the national average. In contrast, the average cost of living in Texas and Florida is 7% and 2% below the national average, respectively. Obviously, these numbers will vary by where one lives in each state and the level of household income, but it appears that the vast majority of people save substantially by leaving California for a less expensive place to live.
Issues with living in California or New York City will likely get worse under the Trump administration as there will be continuing conflict between those locations and Trump. Further, global warming seems to have created a much higher risk of fires throughout California.
Of course, the offset to the high cost of living is that California (and New York City) has higher salary opportunities than the national average. But most recently, due to Covid, a subset of workers can be virtual. Additionally, those who retire are not dependent on where they live to generate income.
All in all, we expect the migration from places like California and New York to continue in 2025.
I entered 2019 with some trepidation as my favored stocks are high beta and if the bear market of the latter portion of 2018 continued, I wasn’t sure I would once again beat the market…it was a pretty close call last year. However, I felt the companies I liked would continue to grow their revenue and hoped the market would reward their performance. As it turns out, the 5 stocks I included in my top ten list each showed solid company performance and the market returned to the bull side. The average gain for the stocks was 45.7% (versus the S&P gain of 24.3%).
Before reviewing each of my top ten from last year, I would like to once again reveal long term performance of the stock pick portion of my top ten list. For my picks, I assume equal weighting for each stock in each year to come up with my performance and then compound the yearly gains (or losses) to provide my 6-year performance. For the S&P my source is Multpl.com. I’m comparing the S&P index at January 2 of each year to determine annual performance. My compound gain for the 6-year period is 499% which equates to an IRR of 34.8%. The S&P was up 78% during the same 6-year period, an IRR of 10.1%.
The 2019 Top Ten Predictions Recap
One of my New Year’s pledges was to be more humble, so I would like to point out that I wasn’t 10 for 10 on my picks. One of my 5 stocks slightly under-performed the market and one of my non-stock forecasts was a mixed bag. The miss on the non-stock side was the only forecast outside of tech, once again highlighting that I am much better off sticking to the sector I know best (good advice for readers as well). However, I believe I had a pretty solid year in my forecasts as my stock portfolio (5 of the picks) significantly outperformed the market, with two at approximately market performance and three having amazing performance with increases of 51% to 72%. Regarding the 5 non-stock predictions, 4 were right on target and the 5th was very mixed. As a quick reminder, my predictions were:
Stock Portfolio 2019 Picks:
Tesla stock will outpace the market (it closed last year at $333/share and opened this year at $310)
Facebook Stock will outpace the market (it closed last year at $131/share)
Amazon Stock will outpace the market (it opened the year at $1502/share)
Stitch Fix stock appreciation will outpace the market (it closed last year at $17/share)
DocuSign stock will outpace the market in 2019 (it is currently at $43/share and opened the year at $41)
5 Non-Stock Predictions:
Replacing cashiers with technology will be proven out in 2019
Replacing cooks, baristas, and waitstaff with robots will begin to be proven in 2019
Influencers will be increasingly utilized to directly drive commerce
The Cannabis Sector should show substantial gains in 2019
2019 will be the year of the unicorn IPO
In the discussion below, I’ve listed in bold each of my ten predictions and give an evaluation of how I fared on each.
Tesla stock will outpace the market (it closed last year at $333/share and opened this year at $310)
Tesla proved to be a rocky ride through 2019 as detractors of the company created quite a bit of fear towards the middle of the year, driving the stock to a low of $177 in June. A sequence of good news followed, and the stock recovered and reached a high of $379 in front of the truck unveiling. I’m a very simplistic guy when I evaluate success as I use actual success as the measure as opposed to whether I would buy a product. Critics of the truck used Elon’s unsuccessful demonstration of the truck being “bulletproof” and the fact that it was missing mirrors and windshield wipers to criticize it. Since it is not expected to be production ready for about two years this is ridiculous! If the same critics applied a similar level of skepticism to the state of other planned competitive electric vehicles (some of which are two plus years away) one could conclude that none of them will be ready on time. I certainly think the various announced electric vehicles from others will all eventually ship, but do not expect them to match the Tesla battery and software capability given its 3 to 5-year lead. I said I’m a simple guy, so when I evaluate the truck, I look at the 250,000 pre-orders and notice it equates to over $12.5B in incremental revenue for the product! While many of these pre-orders will not convert, others likely will step in. To me that is strong indication that the truck will be an important contributor to Tesla growth once it goes into production.
Tesla stock recovered from the bad press surrounding the truck as orders for it mounted, the Chinese factory launch was on target and back order volume in the U.S. kept factories at maximum production. Given a late year run the stock was up to $418 by year end, up 34.9% from the January opening price. But for continuing recommendations I use the prior year’s close as the benchmark (for measuring my performance) which places the gain at a lower 25.6% year over year as the January opening price was lower than the December 31 close. Either way this was a successful recommendation.
Facebook Stock will outpace the market (it closed last year at $131/share)
Facebook, like Tesla, has many critics regarding its stock. In 2018 this led to a 28% decline in the stock. The problem for the critics is that it keeps turning out very strong financial numbers and eventually the stock price has to recognize that. It appears that 2019 revenue will be up roughly 30% over 2018. After several quarters of extraordinary expenses, the company returned to “normal” earnings levels of about 35% of revenue in the September quarter. I expect Q4 to be at a similar or even stronger profit level as it is the seasonally strongest quarter of the year given the company’s ability to charge high Christmas season advertising rates. As a result, the stock has had a banner year increasing to $205/share at year-end up 57% over the prior year’s close making this pick one of my three major winners.
Amazon Stock will outpace the market (it opened the year at $1502/share)
Amazon had another very solid growth year and the stock kept pace with its growth. Revenue will be up about 20% over 2018 and gross margins remain in the 40% range. For Amazon, Q4 is a wildly seasonal quarter where revenue could jump by close to 30% sequentially. While the incremental revenue tends to have gross margins in the 25% – 30% range as it is heavily driven by ecommerce, the company could post a solid profit increase over Q3. The stock pretty much followed revenue growth, posting a 23% year over year gain closing the year at $1848 per share. I view this as another winner, but it slightly under-performed the S&P index.
Stitch Fix stock appreciation will outpace the market (it closed last year at $17/share)
Stitch Fix, unlike many of the recent IPO companies, has shown an ability to balance growth and earnings. In its fiscal year ending in July, year over year growth increased from 26% in FY 2018 to over 28% in FY 2019 (although without the extra week in Q4 of FY 2019 year over year growth would have been about the same as the prior year). For fiscal 2020, the company guidance is for 23% – 25% revenue growth after adjusting for the extra week in Q4 of FY 2019. On December 9th, Stitch Fix reported Q1 results that exceeded market expectations. The stock reacted well ending the year at $25.66 per share and the year over year gain in calendar 2019 moved to a stellar level of 51% over the 2018 closing price.
DocuSign stock will outpace the market in 2019 (it is currently at $43/share and opened the year at $41)
DocuSign continued to execute well throughout calendar 2019. On December 5th it reported 40% revenue growth in its October quarter, exceeding analyst expectations. Given this momentum, DocuSign stock was the largest gainer among our 5 picks at 72% for the year ending at just over $74 per share (since this was a new recommendation, I used the higher $43 price at the time of the post to measure performance). The company also gave evidence that it is reducing losses and not burning cash. Since ~95% of its revenue is subscription, the company is able to maintain close to 80% gross margin (on a proforma basis) and is well positioned to continue to drive growth. But, remember that growth declines for very high growth companies so I would expect somewhat slower growth than 40% in 2020.
Replacing cashiers with technology will be proven out in 2019
A year ago, I emphasized that Amazon was in the early experimental phase of its Go Stores which are essentially cashierless using technology to record purchases and to bill for them. The company now has opened or announced 21 of these stores. The pace is slower than I expected as Amazon is still optimizing the experience and lowering the cost of the technology. Now, according to Bloomberg, the company appears ready to:
Open larger format supermarkets using the technology
Increase the pace of adding smaller format locations
Begin licensing the technology to other retailers, replicating the strategy it deployed in rolling out Amazon Web Services to others
Replacing cooks, baristas, and waitstaff with robots will begin to be proven in 2019
The rise of the robots for replacing baristas, cooks and waitstaff did indeed accelerate in 2019. In the coffee arena, Briggo now has robots making coffee in 7 locations (soon to be in SFO and already in the Austin Airport), Café X robotic coffee makers are now in 3 locations, and there are even other robots making coffee in Russia (GBL Robotics), Australia (Aabak) and Japan (HIS Co). There is similar expansion of robotic pizza and burger cooks from players like Zume Pizza and Creator and numerous robots now serving food. This emerging trend has been proven to work. As the cost of robots decline and minimum wage rises there will be further expansion of this usage including franchise approaches that might start in 2020.
Influencers will be increasingly utilized to directly drive commerce
The use of influencers to drive commerce accelerated in 2019. Possibly the most important development in the arena was the April 2019 launch by Instagram of social commerce. Instagram now let’s influencers use the app to tag and sell products directly, that is, their posts can be “shoppable”. Part of the series of steps Instagram took was adding “checkout” which lets customers purchase products without leaving the walls of the app.
A second increase in the trend is for major influencers to own a portion of companies that depend on their influence to drive a large volume of traffic. In that way they can capture more of the value of their immense influence. Using this concept, Rihanna has become the wealthiest female musician in the world at an estimated net worth of $600 million. The vast majority of her wealth is from ownership in companies where she uses her influence to drive revenue. The two primary ones are Fenty Beauty and Fenty Maison. Fenty Beauty was launched in late 2017 and appears to be valued at over $3 billion. Rihanna owns 15% – do the math! Fenty Maison is a partnership between LVMH (the largest luxury brand owner) and Rihanna announced in May of 2019. It is targeting fashion products and marks the first time the luxury conglomerate has launched a fashion brand from scratch since 1987. Rihanna has more than 70 million followers on Instagram and this clearly establishes her as someone who can influence commerce.
The Cannabis Sector should show substantial gains in 2019
The accuracy of this forecast was a mixed bag as the key companies grew revenue at extremely high rates, but their stock valuations declined resulting in poor performance of the cannabis index (which I had said should be a barometer). A few examples of the performance of the largest public companies in the sector are shown in Table 2.
Table 2: Performance of Largest Public Cannabis Companies
*Note: Canopy last quarter was Sept 2019
In each case, the last reported quarter was calendar Q3. For Tilray, I subtracted the revenue from its acquisition of Manitoba Harvest so that the growth shown is organic growth. I consider this forecast a hit and a miss as I was correct regarding revenue (it was up an average of 282%) but the stocks did not follow suit, even modestly, as the average of the three was a decline of 54%. While my forecast was not for any individual company or stock in the sector, it was wrong regarding the stocks but right regarding company growth. The conclusion is humbling as I’m glad that I exercised constraint in not investing in a sector where I do not have solid knowledge of the way the stocks might perform.
2019 will be the year of the unicorn IPO
This proved true as many of the largest unicorns went public in 2019. Some of the most famous ones included on the list are: Beyond Meat, Chewy, Lyft, Peloton, Pinterest, Slack, The Real Real, Uber and Zoom. Of the 9 shown, four had initial valuations between $8 billion and $12 billion, two over $20 billion and Uber was the highest at an $82 billion valuation. Some unicorns found the public markets not as accepting of losses as the private market, with Lyft and Uber stock coming under considerable pressure and WeWork unable to find public buyers of its stock leading to a failed IPO and shakeup of company management. There is more to come in 2020 including another mega one: Airbnb.
2020 Predictions coming soon
Stay tuned for my top ten predictions for 2020…but please note that all 5 of the stocks recommended for 2019 will remain on the list.
Soundbyte
Before the basketball season began, I had a post predicting that the Warriors still had a reasonable chance to make the playoffs (if Klay returned in late February). Talk about feeling humble! I guess, counting this I had 3 misses on my predictions.
SOUNDBYTES II 