Finance
Two unstoppable growth stocks that could crush the S&P 500 over the next five years
The S&P500 index has delivered annualized returns of approximately 10% since 1957. This closely approximates the growth of average operating income. income. If you want to beat the market, you want to look for companies that can grow their profits well above average.
Here are two companies that could deliver superior earnings growth and outperform the S&P 500 over the next five years.
1.Tesla
Tesla (NASDAQ: TSLA) The stock has delivered an 8,500% return to shareholders over the past twelve years, but the stock hasn’t hit new highs since 2021. However, the stock has followed this pattern before. The shares previously posted modest gains between 2014 and 2018, before soaring tenfold to their previous high of $414. This is why another bull run is coming.
Despite higher interest rates and increasing competition in the electric vehicle (EV) market.Tesla delivered a strong second-quarter update, with auto revenues up 14% in the first quarter. Tesla remains one of the most profitable automakers in the world. It generated $8.1 billion in adjusted net profit on $95 billion in revenue over the past four quarters.
Tesla will emerge from this downturn in a stronger competitive position thanks to its efforts to reduce costs per vehicle. The opportunity for electric vehicles remains enormous, with annual sales expected to more than double over the next four years, according to Statista. By lowering costs, Tesla will remain a formidable leader that can profitably sell cheaper electric cars and capture a significant share of the market.
CEO Elon Musk has previously said he believes Tesla could one day make $1 trillion in profits. That’s a long-term goal, but it shows that management is increasingly investing in initiatives that will increase the company’s margins and deliver strong earnings growth over time. Some of these opportunities should materialize within the next five years, such as increasing subscriptions to Tesla’s self-driving software, energy solutions and robotaxi service.
Analysts expect Tesla’s profits to nearly double next year, which could be the start of a trend. As automotive revenue returns to growth and Tesla continues to improve its profit margin, the company can deliver double-digit earnings growth to support market-beating returns.
2. Spotify technology
Spotify technology (NYSE: SPOT) The shares are up 128% in the past twelve months, driven by growing demand for premium subscriptions. The company is abusing its profits by releasing more content and raising prices, and these actions could lead to more market-beating returns for shareholders.
Not many services are reporting double-digit revenue growth in this challenging retail environment. But music and podcast listeners clearly value their monthly Spotify subscription. Spotify’s total monthly active users grew 14% year-over-year to 626 million in the second quarter.
Spotify dominates the audio market by expanding into audiobooks and podcasts. Last quarter, it posted premium subscriber growth of 12% year-over-year, which helps it generate more revenue. Most importantly, the company’s content strategy ensures better user retention and better profitability for the platform.
Spotify recently implemented price increases in certain markets, but the higher rates have resulted in less subscriber churn than the previous price increase. This means that higher rates benefit the operating result. The company’s operating profit margin was 7% in the second quarter, completely reversing the operating loss from the same quarter last year. The profit margin is expected to increase further in the long term.
Analysts expect the company’s adjusted earnings to reach $10.41 per share in 2026 – an exponential improvement from negative earnings in the past. With Spotify’s operating margin still relatively low for a subscription service, there could be significant room for more margin improvement and robust earnings growth that can support market-beating returns.
Should You Invest $1,000 in Tesla Now?
Before you buy shares in Tesla, consider this:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Tesla wasn’t one of them. The ten stocks that made the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $641,864!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns August 6, 2024
Johannes Ballard has positions in Tesla. The Motley Fool has and recommends positions in Spotify Technology and Tesla. The Motley Fool has one disclosure policy.
Two unstoppable growth stocks that could crush the S&P 500 over the next five years was originally published by The Motley Fool
