3 growth stocks to buy that could be big winners in the long term

By | December 22, 2023

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A proven way to make money in the stock market is to buy and hold solid companies for the long term. This strategy allows investors to take advantage of secular growth trends and helps them capitalize on the power of compounding.

However, investors looking for outsized profits can look for fast-growing companies that have the potential to outperform the broader market. This is where growth stocks come into the picture. Companies that have developed disruptive products are typically able to increase their sales and profits much faster than the markets in which they operate, and this allows them to achieve above-average returns.

Below are three such companies that are growing at an impressive pace and also appear capable of maintaining their momentum over the long term, leading to potentially healthy profits for investors.

1. Confluent

Confluent (NASDAQ: CFLT) scratches the surface of a massive opportunity within the data streaming market, which the company estimates is worth an estimated $60 billion. Confluent estimates that the addressable market could reach an impressive $100 billion by 2025. The company has generated $732 million in revenue over the past twelve months, meaning it has tapped into just over 1% of the total addressable market.

Using Confluent’s platform, customers can make real-time decisions by connecting their data instead of storing it in silos and processing it in batches later. The company has registered impressive growth in its customer base and is preparing to capitalize on the opportunities that arise in the longer term.

Confluent ended the third quarter of 2023 with 4,910 customers, an increase of 16% compared to the prior year period. The great thing was that the number of major customers grew faster thanks to higher spending. Customers with more than $100,000 in annual recurring revenue (ARR) increased 25% year-over-year to 1,185, while customers with more than $1 million in ARR rose at a faster pace of 38%.

The company has forecast full-year revenue of $768.5 million, which would be a 31% increase from the previous year. Additionally, Confluent is targeting 30% annual revenue growth over the long term, which the company appears capable of doing given the expansion of the market it operates in and the vast untapped opportunity.

If that is indeed the case and Confluent’s revenue grows at a compound annual growth rate of 30% through 2028 (using the estimated $768.5 million in 2023 revenue as a base), after five years it would reach $2.85 billion in revenue can reach. Confluent currently trades at 10 times sales. Even if it trades at a discounted price-to-sales ratio of 5 after five years and reaches sales of $2.85 billion, its market capitalization could rise to more than $14 billion by 2028.

That would be double the company’s current market cap, suggesting that investors could benefit greatly from buying and holding these cloud stocks in the long run.

2. ASML Holding

The size of the global semiconductor market is expected to exceed $1 trillion in sales by 2030 and grow at an annual rate of 9% through the end of the decade. ASML Holding (NASDAQ: ASML) is one of the best ways for investors to take advantage of this massive end market, given the company’s positioning in the semiconductor industry.

ASML supplies chipmaking equipment, lithography machines to be precise, to semiconductor foundries and manufacturing plants. Mordor Intelligence estimates that the size of this market could increase from an estimated $24 billion this year to $35 billion by 2028. However, this is not the only major growth opportunity for ASML, as the company is the only supplier of extreme ultraviolet lithography (EUV) machines.

EUV machines are needed for making advanced chips using smaller production nodes. Demand for these chips is skyrocketing due to their applications in multiple end markets, ranging from smartphones to computers to artificial intelligence (AI) servers. Not surprisingly, the market for EUV machines is expected to grow much faster compared to regular lithography machines.

According to third-party estimates, EUV market revenues could quadruple to $37 billion by 2030, compared to this year’s estimated revenue of $9.3 billion. That translates into a compound annual growth rate of almost 22%. More importantly, ASML is already benefiting from this solid opportunity. The company forecasts a 30% increase in sales in 2023, while analysts expect earnings to rise 34% to $21.27 per share.

The company is expected to achieve annual earnings growth of 23% over the next five years. That would bring earnings to almost $60 per share in 2028. If we multiply the estimated earnings by ASML’s average five-year forward earnings multiple of 35, this suggests a share price of $2,100 after five years. That is almost three times the current level, making ASML one of the best semiconductors for the long term.

3. Twilio

The communications platform-as-a-service (CPaaS) market has been growing at a good pace. Future Market Insights estimates that the global CPaaS market could generate $59 billion in annual revenue by 2032, up from just $6.4 billion last year. Twilio (NYSE: TWLO) is the leading player in this market with an estimated share of 24%, according to IDC.

However, the company is going through a difficult period. Macroeconomic headwinds have negatively impacted spending on the company’s offering, which allows organizations to connect with their customers through Twilio’s APIs (application programming interfaces). These APIs allow Twilio customers to eliminate the need for physical contact centers. Customer service representatives can easily install Twilio’s APIs on an internet-connected computer and connect with customers across multiple channels, including voice, text, and email.

Given the many advantages of cloud-based contact centers (which Twilio enables) over physical contact centers, the slowdown in spending in this market should be temporary. It’s also worth noting that the company is integrating new technologies like AI into its CPaaS offering, and this could give its growth a nice boost in the long term.

As such, investors looking to buy a potential growth stock may want to buy Twilio right away, especially considering it is set to become profitable this year. Twilio is expected to end 2023 with non-GAAP earnings of $2.15 per share, compared to a loss of $0.15 per share last year. Moreover, analysts have revised their net growth expectations upwards in recent months.

TWLO EPS estimates for the next fiscal yearTWLO EPS estimates for the next fiscal year

TWLO EPS estimates for the next fiscal year

The chart above shows that Twilio’s earnings growth is likely to accelerate from 2025 onwards. The acceleration of the company’s bottom line has recently been accompanied by a sharp turnaround in Twilio’s stock market fortunes. The stock is up 36% since the company reported its third-quarter results on November 8, and it appears capable of maintaining its long-term momentum thanks to improving earnings power. This gives investors a good reason to buy the stock before it soars higher.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends ASML, Confluent and Twilio. The Motley Fool has a disclosure policy.

3 Growth Stocks to Buy That Could Be Huge Long-Term Winners Originally published by The Motley Fool

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