Elad Blog: Index Companies

Index Companies

Sometimes there are markets that are clearly going to grow massively over time. For example, ecommerce, genomics, crypto are all markets which were clearly going to compound over time. It might have been tough to call the winners of each market early, but it was clear the markets themselves would grow a lot.

One lens through which to view companies is to ask "what companies are an index of their underlying market"? 

Index companies often take a cut of every transaction in their space, or are a piece of infrastructure everyone in the market needs. For example, it is a hard to launch something into space in the West without using SpaceX. These companies may be ways to participate in the market broadly without having to worry about how wins in it.

Some example index companies are:

Online Commerce & Stripe. 

For many years Stripe effectively acted as an index of startups in online commerce. One can argue Stripe is now a proxy for the underlying global online economy. Buying Stripe means buying an important subset of the internet.

Crypto & Coinbase. 

Crypto is a dynamic market with hundreds of tokens beyond BTC and ETH. As long as Coinbase lists it and takes a cut of transactions, Coinbase is a proxy index for all of crypto. With its pending IPO, Coinbase will effectively be an index for crypto writ large. Coinbase is also unique as a high quality company which institutional investors can use as a proxy to participate in the crypto world, even if they are not allowed to hold crypto directly themselves.

Genomics & Illumina. 

I would not be surprised if 90% of clinical genomics were run on Illumina machines. Illumina stock is a proxy for the clinical use of genomics.

Space Launch & SpaceX. 

Today a majority of commercial space launches for the western world are conducted on a small number of companies with SpaceX as the majority of that share. There is a reasonable scenario that in 5-10 years time most of space launches will consolidate to SpaceX and Relativity. Right now SpaceX is a proxy for the entire space launch market. Relativity seems like a strong #2 technologically, although yet to launch a commercial rocket.

AI & Chips Companies. 

The best way to index AI is likely through an underlying AI-chip company. Today that is NVIDIA but GPUs are not really optimized for ML applications. One could argue Google should have launched its TPUs for others to buy directly, versus as a cloud service. Since it has not, potential contenders include Groq and Cerebras.

Fragmented indices

Some markets have a few players that index them - or the revenue mix of the companies prevents a pure play view. For example, AWS, Azure, and GCP are an index of the cloud, but none are investable as stand-alones.

Future indices?

It is fun to speculate on what markets or companies may have index companies emerge. For example, is Substack an index of next-gen journalism?  Zoom an index for remote work? 

Or you can turn it around and ask "What trends are important? Are there companies that represent a proxy for all the activity in this trend?" For example, what is an index for 3D printing? Or DeFi (is it ETH?)? Or....?

What are other "index companies" for exciting markets? Let me know on Twitter.