Is there anything more exciting than getting in on the ground floor of an amazing opportunity? Imagine you’re Eduardo Saverin meeting up with and partnering with another Harvard student named… Mark Zuckerberg.
As times change and technology advances, new industries and opportunities regularly arise. Can you name a few enormous new markets that were opened up over the last several decades? You may have come up with the Internet, wireless communications, smart phones, GPS mapping and clean energy.
When a new market is just starting to open, some corporations, often small, young, and able to act quickly, dive head first into the void in the hopes of emerging as the leader. Any profits it may achieve must be reinvested to grow the business as fast as possible. We call these businesses emerging growth corporations.
These corporations, often because they’re very small, may be able to ride the new market’s growth and double, triple or quadruple their revenues in a short period of time. The value of your stock may do the same! That’s the best scenario.
The negative scenario is either of the following:
- the new market never really materializes. For example, the conventional wisdom about 3D printers was that as soon as the price was brought down to the magic $1,000 (or lower) threshold, consumers would rush to get their own. The prices eventually came down, but the consumers stayed home. Critics would say “there’s no there, there.”
- the new market does take off with demand growing nicely, but many competitors, including larger ones with greater resources, barge in and ensure that the emerging growth corporation doesn’t, well, emerge.
|Suitable for||Young, aggressive investors who want to take a small portion of their investable assets and try to hit a home run.|
|Examples||GoPro (GPRO), Fitbit (FBIT), and 3D Systems (DDD).|
|In the news||GoPro shares fell 30% after it announced the end of its drone business, and it could be seeking a buyer – January 8, 2018
Garmin, Samsung Join Fitbit in Season of Wearables, Says Raymond James – September 1, 2017
|Connections||An emerging growth corporation, if it can manage to be one of the top few in a market that continues to expand, can become a growth corporation that may be able to reel off a decade or two of above average growth.|
|Explorations||Research the following markets and identify why they didn’t grow into something huge: consumer 3D printers, fitness wearables and consumer drones.
Biomedical corporations, ones on the leading edge of new approaches to treating illness, would be best categorized as emerging growth stocks. Many of these corporations, however, are working on a single drug for a single illness. If the company or the Federal Drug Administration (FDA) announces that trials have shown it to be ineffective, that can lead to epic losses for the shareholders. Imagine losing up to 80% of the value of that investment on the day the bad news is announced, and you get the idea.