6 Steps to Finding the Next Micron

There are over 700 technology stocks in the United States alone. The most exciting of these represent the greatest profits that investors have ever realized. These are the disruptive tech stocks that everyone wished they knew about in advance. Microsoft, Nvidia, Tesla. Today we'll tell you exactly how to find the next great growth story by avoiding the not so great growth stories. That's easier said than done because every technology company out there has some great spiel for investors. Today, we'll talk about exactly how we go about evaluating any great disruptive technology story. After a decade on Wall Street, two decades analyzing tech stocks, and three degrees, I've learned it all boils down to six steps. One, evaluating revenues, not profits, revenues. Two, deducing future profitability from gross margins. Three, analyzing the actual exposure that you're getting. Four, scrutinizing SEC filings, not investor decks. Five, making sure the opportunity is big enough. And six, being wary of false signals. Let's start with the most important indicator of disruption, revenue growth. When a company starts to sell a product or service, they start to generate revenues. Not grants, not consulting projects, not related party roundtpping revenues, but actual revenues coming from their core offering. Companies that have meaningful revenues coming from their core offering have demonstrated something called product market fit. This is the stage where a company's target customers are actively buying, using, and advocating for that product. Without product market fit, resources are wasted on marketing and customer acquisition for a product that fails to retain its users. If a company has no revenues, they have accomplished nothing. Turn around and walk away. That's the domain of venture capitalists, not publicly traded companies. If a company realized a million dollars in revenues in a single year, you do the same thing. Walk away. There are some exceptions to this rule, such as drug discovery companies, but in nearly all cases, if a company doesn't have meaningful revenues defined as $10 million perom or more, walk away. Only when a company has realized $10 million in revenues per year or more, do we move on to the next key metric, gross margins. Now, a surprisingly large number of folks out there use the words revenue and profit interchangeably. So, we're going to assume that you've already passed that hurdle and move on to talking about cost of goods sold or COGS. This is used to calculate gross margin, not operating margin. Let me be clear here. We do not expect any disruptive tech company to be profitable. Quite the opposite. We do however expect them to be selling a product or service for more than it costs to produce. That's called a positive gross margin. Companies that do not have positive gross margins should be avoided like the plague. They're subsidizing their customers. When gross margin flips positive and that trend persists over time, then you can disregard that concern. This happens with some companies. Rocket Lab being a great example of a company that managed to do this and for which going long when that happened, as we correctly pointed out several years ago, turned out to be the right thing to do. But before you go long any company, you need to understand what exposure you're getting from that investment. We call this the invest in everything with Google problem. For example, Google's working on quantum computing, but Google's not a quantum computing stock. Why? Because when you look at where revenues and profits come from, it's not quantum computing. Google's working on self-driving with their subsidiary Whimo. If you look at revenues coming from Whimo, not profits, because Whimo is likely a long ways from being profitable at the moment, but if you look at revenues coming from Whimo and compare them to Google's total revenues, they're extremely minuscule. Google is not a self-driving stock. always understand where revenues come from and where profits come from eventually when there are profits. How can we do this? Well, we can look at 10 Q or 10K filing documents. In the age of AI, you should have no problem figuring out how to browse the SEC filing database for any company you own. The documents you're looking for are the 10K first and foremost. If that's not available, you can look for the 10Q. If you can't find either, it's probably a foreign company or a recent IPO, in which case that's a conversation for a different day. For all US companies that have been trading for a year or longer, the 10K will be the document you want to look for. These days, you can just ask a generative AI model like chat GPT or Grock, the ought to verify what it's telling you by going to the source. And I've done that here. I've asked Grock, go to the latest Google 10K and find me revenue segmentation by function and geography. And of course, it did a great job of pulling up that information. You can see here in this table, it says revenue by type, function, segment, and product. So then you can start going through these segments to see what an investment in Google really means. You see they've broken out things like Google search, YouTube ads, Google cloud. Then you can go and start defining each of these segments and understanding exactly what exposure you're getting. And further down in the 10K, Google will break out for the broader segments what sort of profitability each segment realizes. That's very handy to know. This is the sort of basic analysis you'll want to do in a 10K or a 10Q, understanding what exposure you're getting for the stocks that you're invested in. Then when you understand that exposure, you want to start looking at how big the opportunity is. Is the opportunity big enough for a company to truly grow into the next Tesla, Microsoft, Nvidia growth story? Is the opportunity blue ocean or is it displacing existing solutions? An example of ginormous blue ocean opportunities would be autonomous driving or humanoids. These are opportunities that are waiting to be captured by the person that gets there first. Then you have opportunities that aren't blue ocean. These would be where you have to displace existing legacy solutions. Giant themes such as cyber security or big data storage and analytics would be two good examples. We refer to this as total addressable market or TAM. Now, every company out there is going to say its TAM is massive, right? and their competitors will likely say the same thing or not. You might find large variance between what one company says and another one does. Just like when you look to Mumbai research firms out there of which there are dozens, they all have some number to offer up. These will vary widely and are not to be trusted. Generally, big five consulting firms will be directionally accurate and they'll help you arrive at the size of the opportunity. And a rough rule of thumb would be that well anything below $10 billion is really too small. We generally look for opportunities of a hundred billion dollars or more. And then in the aforementioned examples of humanoids or autonomous driving, you're measuring those opportunities in trillions, right? You're looking for that next big growth story. This is where you need to decide what exposure you want in your own disruptive tech stock portfolio. Don't get fixated on that one big thing. That's your next pathway to wealth. Be very careful who you listen to out there as most people on social media, that's where retail investors go for information these days, most have no academic or industry experience and will mislead you. In many cases, that's not intentional. It's just something that's called being unknowingly incompetent. A great example of this would be the large number of people who can't distinguish between active and passive investments. Black Rockck owning your stock is not a bullish signal at all. They're the largest passive investor in the world. They hold the stock because they have to, not because they choose to. Even if Warren Buffett himself buys a stock, that doesn't mean that you should too. He's not telling you why he's buying or more importantly when he's planning to sell. Aping the trades of active managers will not make you a better investor. You'll learn nothing. The same holds true for any notable figure buying or selling a stock. This is nothing but noise. Always formulate your own thesis independent of what other people say. Insider selling is another example of a signal that's largely useless without extreme amounts of context. Insider buying, that's a different story, but it still tells you very little. The same holds true for lauding the greatness of company management teams. We expect them to be great. That's what they're getting paid the big bucks for. Unless you work with these people, you know nothing about them except for the public personas that they carefully craft. So just to review, revenues are ground truth that a company is disrupting. Gross margin must be positive and that shows us the potential for future profitability. Always understand the actual exposure you're getting from holding any given stock. To find that out, dig into the most recent 10K filing. Always make sure the opportunity is big enough if you hope to find the next Microsoft or Tesla or Nvidia. And be very careful about being misled by false signals. Now, the six steps we've talked about today catch most problems before they get expensive. But even a great company can hurt your portfolio if you size it wrong. That's exactly what we're covering next. Give this video a watch. Thanks for taking the time to watch this today.