Major secular trends are the perfect starting point when searching for new investment ideas. Innovations such as cloud computing and financial services only getting more momentum. Of course, not every stock in a certain industry will beat the market over a long time frame, so the next thing I search for is a competitive advantage in the company. What separates a company from its competitors?
With this in mind, SoFi Technologies and DigitalOcean Holdings have recently caught my eye, and I believe both of these can grow tenfold over the next decade. Here is why.
Cloud computing has fundamentally altered the way businesses use tech resources. This ability allows companies to access services such as storage and compute through the internet, eliminating the complexity of managing the hardware on-site. However, the products given by legacy cloud vendors are usually aimed at larger enterprises, meaning they are often too complex for individuals, start-ups, and small or medium-sized businesses.
For this reason, DigitalOcean is simplifying cloud computing. Just like legacy vendors, its cloud gives a range of platform and infrastructure services, but these services have a more intuitive click-and-go user interface, and transparent consumption-based pricing. DigitalOcean also gives live support 24×7 to every customer, regardless of their price point.
Going forward, the firm is well stationed to keep its momentum. Global spending on tech infrastructure and platform services will reach $116 billion by the year 2024, as reported by the Intl. Data Corp. And DigitalOcean believes there are now 100 million SMBs and 19 million developers across the globe, meaning its current base of customers comprises a small fraction of its real potential.
SoFi is a one-stop-shop for banking services. The breadth of its platform goes beyond that of most banks and other fintech companies, giving customers access to lending products such as student loans, personal loans, home mortgages, investing tools, cash-back credit cards, and insurance from third-party partners.
More crucially, SoFi gives this through a single mobile-first platform, which has aided it in gaining traction with its consumers. In fact, the amount of SoFi members has gone up for the past eight consecutive quarters, and the amount of products used by these members has grown even faster. As a result, SoFi is bringing in revenue at a fast pace.
In Oct. 2020, SoFi got preliminary, conditional approval for its U.S. bank charter, a key part of its future growth strategy. And previously this year, the company unveiled its intention to buy Golden Pacific Bancorp, a community bank based in the state of California. Once SoFi has brought its banking charter and completed this acquisition, management sees greater upside.
Specifically, SoFi will give deposit accounts to its customers using its money management product ( called SoFi Money). And the cash inside those accounts can then fund SoFi’s lending products, lowering its costs to originate loans. Because of this, SoFi will now be able to give lower interest rates to borrowers and give higher interest to SoFi Money account customers.
Management currently puts its overall opportunity at $2 trillion, giving the firm plenty of room to grow its profits.
Author: Blake Ambrose