Searching for the Next Microsoft

It was on this day forty years ago that Microsoft (NSDQ: MSFT) co-founder Bill Gates introduced Windows 1.0 to the public. To run it, you needed two floppy disks and a personal computer (PC) with at least 256KB of Random Access Memory (RAM).

The software didn’t do much. It came with a calendar, a clock, and the first version of Windows Paint. Not exactly the type of stuff that excites the animal spirits on Wall Street.

At the time, the significance of this event was only appreciated by the tech community. To everyone else, it seemed a bit farfetched to believe that a PC running this software would somehow revolutionize the business world.

In fact, PCs running on Windows did revolutionize the business world. The Microsoft Office suite of business productivity tools introduced in 1990 included Word 1.1, Excel 2.0, and PowerPoint 2.0.

Since then, Microsoft has added other software products to the Office package. It has also dropped a few along the way that became obsolete.

The result has been one of the most staggering success stories ever seen on Wall Street. Through the end of October, MSFT has delivered a total return of 572,902% since going public on March 13, 1986.

Put another way, every 6 cents invested in MSFT that day (its share price on a dividend and split-adjusted basis) was worth $338 this past Halloween! That’s a very tasty treat for investors that had the courage to buy into what at the time was a scary proposition.

The Next Wave

Now, Microsoft is considered one of the safest best on Wall Street. Its market cap of roughly $2.6 trillion makes it the second most valuable publicly traded company in the world [Apple (NSDQ: AAPL) is first at nearly $2.8 trillion].

All of which got me to wondering; What small company today might become a global colossus over the next forty years? Given my age, that may not do me much good but could be enormously valuable to my future grandchildren.

Right now, just about everyone on Wall Street believes that artificial intelligence (AI) is the next big technological wave. It is the engine that drives advances in robotics, augmented/virtual reality, and autonomous driving vehicles to name a few of its practical applications.

A year ago, AI was just one of several emerging technologies that captured the imagination of Wall Street. But after the introduction of ChatGPT on November 30 of last year, companies involved in AI have shot up in value.

The most notable example is NVIDIA (NSDQ: NVDA), which I added to the Personal Finance Growth Portfolio in October of last year while it was trading near $115. Yesterday, it traded above $480 for a gain of better than 300% in just 13 months.

For that reason, some people feel that AI software developer NVIDIA has become overvalued. That may be true from a short-term perspective. But if NVIDIA really is the next Microsoft, then it could appreciate considerably more than that in the years to come.

That may be so, but NVIDIA has a market cap of $1.2 trillion. That means it need only to double in value to become nearly as valuable as Microsoft. That’s not enough upside potential for this exercise.

Making the List

The company I’m looking for would be considerably smaller than that at present. It should be a small-cap stock that is big enough to survive but still small enough to grow at a high rate for years to come.

It must be a company in the information technology sector that has been able to grow its revenue at least 50% over the past three years. I don’t care about earnings yet, since it should be reinvesting all its free cash flow into growth initiatives.

When I punched those three requirements into my stock screener, only 27 stocks made the list. Some of the names I recognized, but most of them I did not.

My guess is many of them will fall by the wayside. Either their product will become obsolete, or a competitor will acquire them. That is the Darwinian reality of the stock market.

But a few of them will be able to remain competitive while avoiding being acquired. Over time, they will gradually emerge as market leaders. Eventually, one of them could emerge as the next Microsoft.

I am tempted to buy all 27 of them and put them in an account for my future grandchildren. That way, they are assured of owning the next Microsoft even if I don’t know which one it is.

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