Tesla (NASDAQ:TSLA) is certainly an exciting growth story, and it's even fair to say that electric vehicles are likely the future of American transportation. However, the company is highly unprofitable and trades for a sky-high valuation. For these and other reasons, our contributors feel that there are better growth stocks to invest in now. Here's why they prefer Square (NYSE:SQ), Moody's (NYSE:MCO), and Physicians Realty Trust (NYSE:DOC) for long-term growth investors.
An untapped market and lots of cross-selling potential
Matt Frankel (Square): Payment-processing company Square could be as revolutionary to how small businesses operate as Tesla has been to how we think about electric cars.
Square's core payment-processing business has grown tremendously, with gross payment volume up by 31% in the past year alone. And the market for small-business card-processing solutions is largely untapped.
Most traditional payment systems are prohibitively expensive for small businesses, and Square is only in five countries so far. It's estimated that two-thirds of businesses around the world still don't accept card payments, and global card payment volume is expected to reach $55 trillion by 2025 -- so it's fair to say that there's a lot of opportunity here.
This would be impressive enough, but payment-processing solutions are only part of Square's growth potential. For example, Square Capital, the company's small business lending platform, originated 45% more loans in the most recent quarter than it did a year ago. In all, the company's subscription and service revenue has grown by 84% year over year.
Finally, Square recently announced that it's experimenting with allowing bitcoin buying and selling through its Square Cash payments app, which could have significant long-term revenue potential for the company. Plus, after a recent analyst downgrade, Square has fallen about 25% from its highs, so this could be a good opportunity to get in.
A cash cow that can grow for years to come
Jordan Wathen (Moody's Corporation): When a company wants to borrow money, it turns to one or all of the big three credit-ratings agencies -- S&P Global, Moody's, and Fitch. Each company charges a fee for the service of ascribing a letter grade to the bond that the corporate borrower wants to issue.
These bond ratings are essential because getting a rating often leads to a lower borrowing cost. Insurance companies, banks, and even mutual funds have rules about what bonds they can hold, based on their ratings. As bond index funds become more popular, ratings become even more important, since the largest bond indexes use bond ratings as one of their key determinants in whether a bond is put into a particular index.
In short, the ratings agencies essentially operate a toll road to the bond markets. If a company wants to borrow money, it has little choice but to pay a service fee to one or more of the ratings agencies. The alternative is to issue an unrated bond, and pay a higher interest rate on the amount borrowed.
It's my view that Moody's has a long runway for growth, as financial markets steal share from banks and the share of rated borrowings increases across the world. Earnings could grow at a mid-single-digit pace for a very long time, more than justifying a price of approximately 22 times earnings estimates in 2018.
Furthermore, Moody's capital-light business model enables the company to return virtually all of its earnings to shareholders in the form of dividends and repurchases, which only adds to its long-term return potential. Moody's is a "buy, hold, and ignore" growth stock for the long haul.
If demographics is destiny, this company should do well
Chuck Saletta (Physicians Realty Trust): America's population is aging, with the number of people age 65 and over expected to double by 2060. That bodes well for the retirement dreams of those looking to live to a ripe old age. Living longer, however, also brings challenges. Chief among them is that people tend to need more and more costly healthcare services as they age.
That's what makes Physicians Realty Trust a compelling growth opportunity to consider. A company that specializes in renting real estate to doctors and medical facilities, Physicians Realty Trust is poised to take advantage of that aging demographic trend. After all, those medical services have to take place somewhere, and having a company that specializes in the facilities enables the doctors to focus on their care while the real estate experts focus on the building.
Unlike Tesla, which is still wildly unprofitable, Physicians Realty Trust actually generates positive profits and operating cash flows. Not only that, but Physicians Realty Trust pays its shareholders a cash distribution of $0.23 per share per quarter, a distribution that has actually edged slightly higher within the past year. With earnings expected to grow at a solid 9.7% annualized rate over the next five years, Physicians Realty Trust looks poised to reward shareholders with both income and potential growth.
Chuck Saletta has no position in any of the stocks mentioned. Jordan Wathen has no position in any of the stocks mentioned. Matthew Frankel owns shares of Square. The Motley Fool owns shares of and recommends Moody's and Tesla. The Motley Fool owns shares of Square. The Motley Fool has a disclosure policy.