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3 Growth Stocks for the Long Term

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Why Adobe Systems,, and Pioneer Natural Resources have plenty of room to grow.

Time is one of the most valuable assets an investor has -- if used wisely, that is. With that in mind, here are three stocks for investors with time on their side. Read on to learn why our Foolish investors picked industry-leading Adobe Systems (ADBE -3.18%), e-commerce titan (AMZN -2.86%), and oil and gas provider Pioneer Natural Resources (PXD 0.08%).

Building a foundation

Tim Brugger (Adobe Systems): With its stock up 42% this year and shares bumping up against 52-week highs seemingly daily, Adobe may not be the first name that comes to mind as a long-term growth stock. But its record-breaking performance shouldn't dissuade investors for one simple reason: Adobe has reached the pinnacle of its industry.

Most of the headlines following Adobe's second quarter were focused on its $1.77 billion in sales, another in a string of record-shattering revenue results. Last quarter's revenue saw a 27% year-over-year jump and obliterated expectations. As for the bottom line, Adobe's $0.75 per share was a 56% improvement over last year's $0.48 a share.

The best part of Adobe's quarter was the near-perfect execution of CEO Shantanu Narayen's initiative to grow Adobe's annual recurring revenue (ARR). Adobe's ARR stands at $4.56 billion exiting last quarter, up 14% from a year ago. Adobe's ARR growth is building a reliable foundation that translates to continual sales and profits growth, with the added benefit of minimal overhead.

It simply costs less to service existing customers than to rely on new sales, which is why Adobe's emphasis on recurring revenue resulted in operating expenses rising just 18% last quarter to $239.4 million. And with 90% of Adobe's $1.77 billion in second-quarter revenue coming from its subscription and servicing units, it's safe to say long-term growth investors will continue to enjoy the ride for years to come.

Performance arrow overlaying a digital map of the world.

Image source: Getty Images.

The everything company

Keith Noonan (Amazon): Beyond the goal of building "the everything store" Jeff Bezos appears to be well on his way to making Amazon "the everything company," and I think investors have the potential to record substantial capital appreciation with the stock even though it trades near lifetime highs.

While Amazon has already built a hugely impressive online retail business, e-commerce accounted for just 8.4% of U.S. retail sales in the first quarter of 2017, and it looks like "the everything store" will continue to be one of the main beneficiaries as online shopping continues to grow. The company also has plenty of room to expand its online retail business outside of North America, with just 34% of its store sales coming from international territories last quarter. 

Amazon's cloud business presents another long-term growth avenue. Last quarter saw revenue from Amazon Web Services (AWS) increase roughly 43% year over year, and, while growth has slowed for the last seven quarters, sales are still ramping at an impressive clip. Operating margins for the segment also look like they will continue to climb, and strong profitability for AWS will make it possible to continue experimenting and investing in new growth categories.

While diversifying into a broad range of businesses can weigh down a company, Amazon has shown impressive savvy when it comes to crafting and executing long-term growth strategies, and the treasure trove of data it's building gives it significant advantages as it pushes into new sectors. The company's willingness to experiment, even if it means suffering some big failures, is an exciting characteristic and one that suggests it still has big growth ahead.

There's still plenty of growth left in the oil market's tank

Matt DiLallo (Pioneer Natural Resources): There's just too much oil in the world right now, which has pushed prices down. However, despite what you might think, the world's current glut isn't due to sinking demand resulting from vehicle efficiency or climate change worries. Quite the opposite.

In fact, oil demand has been accelerating in recent years and isn't expected to stop growing until 2040. Add in the fact that the world constantly needs new supplies due to the depletion of legacy fields, and the current glut could become a shortage in no time at all.

That trend bodes well for Pioneer Natural Resources, which controls a prime position in the low-cost Permian Basin. In fact, Pioneer Natural Resources forecasts that its Permian position can fuel 15% compound annual production growth through 2026. Furthermore, the company believes it can achieve that growth while living within cash flow starting next year as long as crude averages $55 per barrel. If that happens, the company estimates that it will grow cash flow at a 20% compound annual rate.

That's elite-level growth not just for an oil company, but any company. In fact, according to a study by JPMorgan, only 15 stocks in the Russell 1000 Index had delivered more than 20% compound annual cash flow growth over the past decade. More importantly for investors, those stocks significantly outperformed the market over that time frame, delivering an average annual return of 18.8%.

While Pioneer will face its share of headwinds in the years ahead, especially from oil price volatility, it has the low-cost resources and financial strength to continue growing at a rapid pace. If it can come anywhere close to hitting its projections, the stock could deliver market-smashing returns, making it a great oil stock to consider owning for the long haul.

Keith Noonan has no position in any stocks mentioned. Matt DiLallo owns shares of Amazon. Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Adobe Systems. The Motley Fool has a disclosure policy.

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Stocks Mentioned, Inc. Stock Quote, Inc.
$138.23 (-2.86%) $-4.07
Adobe Inc. Stock Quote
Adobe Inc.
$425.06 (-3.18%) $-13.97
Pioneer Natural Resources Company Stock Quote
Pioneer Natural Resources Company
$242.00 (0.08%) $0.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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