Please ensure Javascript is enabled for purposes of website accessibility

2 Growth Stocks That Could Soar Over the Next 5 Years

By Daniel Sparks – Oct 6, 2020 at 7:05AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

One is an underfollowed sub-$1 billion company; the other provides a well-known service.

With the market rebounding sharply from lows during the pandemic-induced market crash earlier this year, it's getting increasingly difficult to find great stocks to buy at good prices. A careful search, however, still yields some promising selections.

Two companies worth considering today -- even after share gains in their stock prices in recent months -- are automotive film company XPEL (XPEL 1.51%) and streaming-TV platform provider Roku (ROKU 1.24%). Here's a quick look at why these two growth stocks could soar higher over the next five years.

Multiple overlaid stock charts, including two that are rising higher.

Image source: Getty Images.

XPEL

With its $730 million market capitalization, XPEL is relatively unknown. However, despite its small size, this protective film and coating manufacturer is executing like a class-act large cap. Shares have surged more than 260% over the past two years as the company's revenue has jumped sharply and its net income has soared.

XPEL's 2019 revenue jumped 18.2% to $129.9 million. Earnings during this same period soared from about $9 million to $14 million, highlighting the company's scalable business model. Even during periods negatively impacted by the coronavirus, XPEL's revenue continued to grow nicely; first- and second-quarter revenue rose 14.8% and 19%, respectively.

With XPEL trading at 62 times earnings, investors will have to pay a steep price to get into this growth story. But investors should keep in mind that the company's bottom line is still soaring. In Q2, net income was up 32% year over year. Management is "cautiously optimistic" that its "second-quarter momentum will continue as we move through the rest of the year."

Roku

Roku may have a much larger market capitalization than XPEL at $25 billion, but the stock's potential seems just as exciting. If you want to invest in the rapidly growing streaming-TV market, Roku is your pick.

Over-the-top devices and smart TVs powered by Roku account for nearly a third of all connected-TV device sales in the U.S. -- more market share than Roku's next two competitors combined. This dominance has made Roku a must-have platform for streaming services.

Roku's revenue increased 52% year over year in 2019. This growth rate, however, understates the trajectory that investors should be tracking: Roku's fast-growing platform business. Unlike total revenue, which includes both platform revenue and revenue from device sales and licensing with TV manufacturers, Roku's platform business primarily includes the company's share of transactions, subscriptions, and advertisements on its platform. Platform revenue surged 78% year over year in 2019.

Roku's platform revenue growth has decelerated recently due to the pandemic, which slowed growth in ad spend. Still, the important segment's revenue still increased a nice 46% year over year in Q2.

If Roku can compound its trailing-12-month revenue of $1.35 billion by an average annualized rate of about 30% to 35% over the long haul while achieving meaningful profitability as its platform scales, the company's $25 billion market capitalization could look like an attractive entry point in hindsight.

Investors buying either XPEL or Roku, of course, should bear in mind the risks of buying individual stocks. There's always a chance that the two companies' current competitive advantages will be eroded, or that their top- and bottom-line growth won't be as strong as expected.

Further, investors in either stock should expect significant volatility; both are growth stocks, which tend to be more volatile than the overall market. However, for investors willing to hold through the ups and downs over the next five years or more, shares seem like a good bet today.

Daniel Sparks owns shares of Roku. The Motley Fool owns shares of and recommends Roku. The Motley Fool has a disclosure policy.

Stocks Mentioned

Roku Stock Quote
Roku
ROKU
$60.52 (1.24%) $0.74
Xpel Inc Stock Quote
Xpel Inc
XPEL
$69.82 (1.51%) $1.04

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

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.