Apple (NASDAQ:AAPL) has delivered market-smashing returns and is up more than 900% over the last 10 years. Propelling those returns has been its ability to produce elite-level revenue and earnings growth. In fact, it is one of only 15 stocks to grow cash flow at a 20% compound annual rate over the past decade. That said, given its enormous size, Apple's best growth days might be in the rearview mirror.
However, growth investors still have the potential to earn Apple-like returns in other stocks. Three companies we think could do just that are Ligand Pharmaceuticals (NASDAQ:LGND), Shopify (NYSE:SHOP), and Pioneer Natural Resources (NYSE:PXD). Here's why.
This stock is "royalty" within the biotech industry
Sean Williams (Ligand Pharmaceuticals): There's little denying that Apple has generated some phenomenal returns for investors, but it's certainly not the only company that has big return potential written all over it. Within the biotech industry, Ligand Pharmaceuticals could be the next stock to deliver an Apple-like return.
Ligand Pharmaceuticals isn't your traditional start-to-finish clinical drug developer. Instead, it develops and acquires technologies that other drug developers use in their experimental drugs. Ligand licenses out these technologies and in return receives a percentage of the net sales of approved therapies. This royalty percentage varies, but it's often around 4.5% of net sales.
There are two key advantages to Ligand's business model. First, the company has exceptionally low overhead costs. Since it's not spending years developing new drugs, and it spends most of its efforts searching for new technology to acquire, the company can be profitable on very little revenue. It's a highly sustainable and high-margin business model.
The other advantage is that Ligand has a vast portfolio of opportunity to hit a home run. In 2008, there was just one Food and Drug Administration-approved drug on pharmacy shelves that was utilizing Ligand's technology. Today, there are 15, and by 2020, the company is projecting there will be greater than 28! The number of experimental drugs in development that are using Ligand's technology tells a similar story. In 2008, only nine drugs in development were using its intellectual property. Today, more than 155 are! This gives Ligand multiple avenues through which to generate revenue, and it ensures the company isn't reliant on just a single drug.
In addition to royalty revenue, Ligand generates materials revenue and milestone/licensing revenue, too. In 2017, nearly $50 million (and maybe more) of its revenue is expected to come from these non-royalty sources.
Long story short, Wall Street expected Ligand to nearly triple its sales between 2016 and 2020 to $287 million, all while its annual EPS more than doubles to $7.66. Its sales figures might pale in comparison to Apple, but its 20%-plus annual growth rate is very Apple-esque.
A lottery ticket for online retail
Jordan Wathen (Shopify): Shopify shares are by no means cheap, at roughly 11 times revenue guidance for 2017, but the runway is long, and the potential for outsize profits in the future is driving its valuation today.
Consumers increasingly expect that businesses of any size have an easy-to-use website to browse inventory and make purchases online. Shopify helps small businesses build out beautifully designed online stores with pricing that starts at just $29 per month. As Shopify brings small retailers up to date, it also has the ability to cross-sell additional products to merchants, from credit card processing to loans for working capital.
Shopify is currently in an all-out land grab for new merchants, growing its customer base and gross merchandise volume by about 54% and 99% in 2016, respectively. And while elevated customer acquisition costs weigh on profitability today, the cost of acquiring a new customer should reward the company with a steady stream of high-margin revenue for years thereafter.
Shopify is by no means a stock for widows and orphans, as there is a high risk of failure. But it may be one of the best pure-play bets on the shift toward online retail for businesses of every size.
One in a million
Matt DiLallo (Pioneer Natural Resources): Oil stocks aren't known for being high growth stocks. Not only are oil prices are notoriously volatile, but oil production is a very capital-intensive business. That said, if Pioneer Natural Resources (NYSE:PXD) delivers on its ambitious growth plan, then the company could deliver Apple-like returns.
Pioneer recently unveiled a 10-year vision to grow production up to 1 million barrels of oil equivalent per day by 2026. To hit that goal, the company would need to deliver 15%-plus compound annual production growth. While that's a bullish forecast, this is a company that was able to deliver 15% production growth last year in one of the worst oil markets in decades.
Fueling Pioneer Natural Resources' future vision is its premier position in the oil-rich Permian Basin, where the company can earn 50% to 100% drilling returns at current oil prices. Because of those stellar returns, Pioneer believes it can deliver double-digit compound annual production growth while living within cash flow over the next decade around current oil prices. In fact, it sees cash flow growing by a more than 20% compound annual rate over the same timeframe. That's elite-level cash-flow growth that only a handful of companies -- including Apple -- have achieved over the past decade, and that's why I believe Pioneer could deliver similar returns in the decade ahead.
Jordan Wathen has no position in any stocks mentioned. Matt DiLallo owns shares of Apple and Shopify and has the following options: long January 2018 $85 calls on Apple and short January 2018 $90 calls on Apple. Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple and Shopify. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.