Sending your kids to college is a key reason many people invest in the stock market. The problem, however, is that it can be tricky to find stocks with the right balance of lower risk and enough upside to generate solid returns. We asked three Motley Fool contributors for stock picks that could help pad your kids' college funds, and they came back with Autodesk (ADSK 1.16%), Electronic Arts (EA -0.21%), and MongoDB (MDB 7.58%).
Brian Feroldi (Autodesk): Software has historically been sold through retailers, distributors, and resellers, but times are changing. The advent of cloud computing now allows software makers to sell their products directly to consumers through a pay-as-you-go model. This not only leads to a better experience for consumers, but it also allows software companies to cut out the middleman and generate higher profits.
Lots of established software companies have made the switch to a software-as-a-service (SaaS) model and have hugely benefited from the change. Autodesk is a shining example of a recent success story.
Autodesk sells a range of computer-aided design products that helps engineers, architects, construction professions, designers, and entertainers to create anything that they can imagine. A few years ago, Autodesk made the switch to an SaaS business model. While that was a painful decision in the short term (some customers were upset and revenue, cash flow, and profits all took a hit), the company is currently reaping the rewards of the transition. The majority of revenue is now recurring in nature, margins are on the rise, and profitability has returned.
Autodesk is currently producing dreamy financial statements. Revenue is growing in excess of 20% annually and profits are growing much faster. Margins are rising and free cash flow is soaring.
Investors have been hugely rewarded over the last couple of years for their patience, but I still think that the best is yet to come. Autodesk has converted "only" 4.3 million of its users to its subscription model. Another 14 million users are still using outdated software that will have to be upgraded eventually.
That opportunity -- when combined with a lot of operating leverage -- helps explains why Wall Street is currently expecting 68% annualized profit growth over the next five years. That's a screaming high growth rate for a business that is trading around 35 times next year's earnings estimates.
A booming industry
Daniel Miller (Electronic Arts): If you're looking for an investment that can help send your kid to college, you'll want to start with well-established companies with plenty of growth left for the decades ahead. One such company is Electronic Arts, one of the world's largest video game publishers with franchises including Madden, FIFA, and Battlefield, among many others. The stock has taken a hit after some backlash from its microtransaction business practices, but it remains well-positioned in a booming industry.
Here are just a couple of reasons for investors to buy into EA's long-term growth story: More and more games have digital distribution and streaming, which enables EA to cut out traditional brick-and-mortar middlemen and drastically reduces the need for packaging and retail distribution -- all factors that make video games more profitable. Another fast-growing category is esports, where people watch the elite players in a slew of games play competitively, and even professionally. While that may not be your cup of tea, it's booming and the audience demographics are especially interesting to advertisers. Further, the growth potential globally and on mobile -- the latter is the fastest-growing gaming platform in terms of revenue -- means there is plenty long-term growth remaining.
A recent aspect that could help boost EA's stock in the near term is new info about its Apex Legends game. After Apex initially started out as a blockbuster, it quickly lost steam with players and failed to live up to the expectations EA had for the title. EA is now preparing to launch the second season, called Battle Charge, which introduces a new weapon and a new legend character, and fixes many complaints from the first season, including adding a ranked mode and challenges. EA has hit some speed bumps recently, but it's well-positioned as a large publisher with strong franchises in a booming industry. If management optimizes its evolving business models, embraces and monetizes esports, and expands globally, it should be a great stock to own over the coming decades.
Monster growth for long-term results
Jeremy Bowman (MongoDB): If you're looking to build up savings to send your kids to college, you're going to want to put a few high-growth stocks in your portfolio, the kind that can deliver ten-bagger returns by the time junior turns 18, and MongoDB looks like just the ticket.
Like many of it software-as-a-service (SaaS) peers, MongoDB -- which calls its core cloud offering MongoDB Atlas, a database-as-a-service (DBaaS) -- is experiencing exponential growth. In its most recent quarter, revenue surged 78% to $89.4 million, driven by an 82% increase in subscription revenue, which makes up the vast majority of its sales, and revenue growth is actually accelerating thanks to the explosive growth of MongoDB Atlas, which saw revenue jump 340% in the most recent quarter. Atlas now makes up 35% of the company's revenue.
The stock has also delivered impressive results as shares have jumped more than 400% in less than two years since its IPO.
MongoDB is still operating at a loss as the company spends aggressively on sales and marketing in order to boost its top-line growth and market share, and on research and development in order to fuel the next wave of products.
The stock also trades at a lofty valuation, with a market cap of $9.2 billion and a price-to-sales ratio of 24 based on this year's expected results. Considering the breakout growth of MongoDB Atlas and the company's long-term opportunity, that valuation seems warranted.
MongoDB has already delivered impressive returns to early investors. Over the next 10 or 15 years, it could do the same for your kids' college funds.