Every decade, a handful of emerging growth companies see their share prices skyrocket, making some early investors millionaires. Nvidia (NASDAQ: NVDA) stock is the most recent high-profile example.
Now, let me start by stating the obvious: it’s very difficult to predict when and where the next big winner will emerge. However, I believe there are patterns we can observe and lessons we can learn.
Here, I’ll touch upon a few of these in the hope that they will help me identify top growth stocks.
Founder-led trailblazers
The first thing to note about big winners is that they’re usually firms operating in emerging industries undergoing huge growth. Second, they’re more often than not led by founders.
We can see this pattern with some of the big tech winners emerging from each decade (with some overlap) from the 1970s onwards:
- 1970s: Intel
- Mega-trend: PC revolution and semiconductor boom
- Led by founders Robert Noyce and Gordon Moore
- 1986-1990s: Microsoft
- Mega-trend: PC software and the rise of the Windows operating system
- Led by founder Bill Gates
- 1997-2010s: Amazon
- Mega-Trend: E-commerce boom and the rise of cloud computing
- Founder-led by Jeff Bezos
Moving into the 2010s and 2020s, we have Nvidia, whose visionary founder-CEO Jensen Huang capitalised on the massive emerging trends of artificial intelligence (AI) and accelerated computing.
There are other examples, including video-streaming pioneer Netflix (Reed Hastings) and electric vehicle trailblazer Tesla (Elon Musk led the firm’s initial round of investment funding in 2004).
A deep moat
Every successful company needs a clear competitive advantage (or moat), and Nvidia has several. One that stands out to me is the network effect it benefits from, where its products increase in value as the number of users grows.
Specifically, CUDA, its leading software development platform, allows programmers to leverage the power of its graphics processing units (GPUs) for general-purpose computing. This includes tasks in AI, machine learning, and scientific computing.
As more developers adopt CUDA, this drives more users towards Nvidia GPUs because they are optimised for CUDA. This ultimately reinforces the platform’s leading position, creating a powerful network effect.
While customers are locked into the Nvidia ecosystem today, that might change as the AI landscape evolves. New technologies could emerge that challenge the company’s dominance. This is a potential risk.
Trojan horses
Finally, it’s striking how many huge winners morphed into something else over time, driven by management’s anticipation of future trends.
For example, Netflix started as a DVD rental business before pivoting towards streaming. Amazon originally sold books online, but much of its value today is in cloud computing.
Meanwhile, Nvidia has transitioned from computer graphics cards into a world leader in AI computing.
My Foolish takeaway
Looking at my own portfolio today, I see some of these themes and patterns playing out.
Led by co-founder George Kurtz, CrowdStrike is benefitting from a cybersecurity mega-trend. The firm’s platform filters over 1trn threat data points daily, allowing it to refine its machine learning models. This is attracting more customers and data, creating a virtuous cycle.
Meanwhile, founder-led MercadoLibre, which is morphing into a fintech powerhouse outside of just e-commerce, is also benefitting from powerful network effects.
Ultimately, we don’t know where the next millionaire-maker is hiding, but I’d bet it will possess many of the features highlighted here.
