Companies that can grow over a long period of time can also make for incredibly profitable investments. But finding such growth stocks may be harder than it seems. We asked three Motley Fool investors for their best growth stocks to hold long term and Alibaba Group Holding Ltd (NYSE:BABA), Vail Resorts, Inc. (NYSE:MTN), and Alphabet Inc (NASDAQ:GOOG) were at the top of the list.
From value to growth stock
Rich Smith: (Alibaba): What makes a stock a growth stock? A cynic (that's me) might answer that a "growth" stock is any stock that's so ridiculously overvalued that you can't possibly call it a "value" stock. It's something you can only justify buying based on overhyped analyst predictions of future growth.
A more measured definition of a "growth stock," though, might go like this: It's a stock that will rise in value when it grows faster than investors expect it to grow, "beating" earnings, and forcing analysts to admit they were wrong and finally buying in. Right now, that looks a lot like one stock that I own, Alibaba Group.
I'll be upfront about this: I own Alibaba, but I don't really like it's valuation all that much. Although I bought it as a value stock a long time ago, it's gone up a lot since I bought it. Today, I can no longer justify calling Alibaba a value stock -- not at 66 times earnings, and not even at 39 times free cash flow. That being said, I do see the possibility for Alibaba to outperform expectations and grow faster than expected, and that could mean good things for the stock.
Why do I say this? Currently, Yahoo Finance data is showing that investors, as a whole, expect Alibaba to grow its earnings 4.83% annually over the next five years. S&P Global Market Intelligence data, however, which I consider more reliable, shows that the consensus of nine analysts polled is that Alibaba will actually grow earnings at closer to 32% annually over the same time period. This latter prediction lines up better with Alibaba CEO Jack Ma's recent prediction that fiscal 2018 sales will grow as much as 49% -- en route to Alibaba booking $1 trillion in annual gross merchandise sales by 2020.
When you consider, too, that Alibaba just blew away analyst estimates for fiscal Q1 2018, I think the company is growing fast enough to surprise a lot of investors -- and outperform the stock market over the long term.
A mountain of an opportunity
Dan Caplinger (Vail Resorts): One company that has found the secret to dominating an industry is Vail Resorts, which has slowly but surely put together a ski-resort empire. Starting from its namesake property in Colorado, Vail Resorts has created a network of ski destinations throughout the U.S. and across the globe.
The company's acquisition of the Perisher resort in Australia gave Vail Resorts some calendar-year diversification because the Southern Hemisphere's ski season is in the Northern Hemisphere's summer months. However, the bigger prize recently has been the addition of British Columbia's Whistler Blackcomb property, which played a key role in the 2010 Vancouver Winter Olympics and draws visitors from around the world.
Now, Vail Resorts is looking eastward. The company already has locations in Minnesota, Michigan, and Wisconsin, but the purchase of Stowe in Vermont gave the company exposure to the Northeastern U.S. market. With the company's season passes giving skiers the ability to visit multiple Vail Resorts properties, investors understand that the bigger the network gets, the more valuable the experience will be for season-pass holders. Winter sports aren't going out of style anytime soon, and Vail Resorts has built itself a competitive advantage that will be hard for rival companies to duplicate.
One of tech's enduring powers
Travis Hoium (Alphabet): Growth stocks worth owning long term need to have a product or business model that's hard to live without, or a moat that's hard to disrupt in the foreseeable future. And I don't see anyone penetrating Alphabet's moat in search, email, and mobile devices anytime soon.
Alphabet is like a gatekeeper on the internet, generating billions of revenue from connecting customers to what they're looking for, including high-value ads we see everyday. You can see below that internet revenue and profits have surged in the last decade, providing an incredible tailwind to Alphabet. On top of search and advertising, the company also invests billions in new technologies that could eventually end up in a new breakthrough.
The combination of growth and cash flow from a virtual monopoly in search and advertising, along with moonshot growth projects, has created a financial powerhouse in tech. And I see no signs of the company's power position in the internet fading. Investors looking for companies that will grow and continue to churn out cash for years to come will love Alphabet.