There's an interesting dilemma when it comes to picking stocks investors can likely hold for years or even decades. On the one hand, investors looking to hold shares for the long haul can stick with stable and established companies that have been around for decades and will likely continue succeeding for the foreseeable future -- companies like Waste Management and Berkshire Hathaway. The downside to this approach, however, is that investors may miss out on the potential outperformance that could come from fast-growing companies over the long haul.
The issue with buying growth stocks, however, is that it's extremely difficult to gauge how long their rapid top-line growth rates can persist. Further, these companies' stock prices could perform very poorly if the growth prospects already baked into the stock price don't pan out. In other words, there's arguably more risk when it comes to betting on growth stocks for the next decade than there is for stable and established companies with decades of success behind them.
So if an investor wants to buy growth stocks with a high chance of exceeding expectations over the next 10 years, they better have some pretty good reasons to believe these companies can do exactly that.
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Here are two growth stocks that have a shot at not only living up to high expectations over the next 10 years but possibly even exceeding them: Zoom Video Communications (ZM -0.73%) and Peloton Interactive (PTON -2.08%).
Zoom and Peloton were already thriving before the pandemic
At first glance, investors may conclude that Zoom is nothing more than a pandemic stock. They may argue that the company's success was predicated almost entirely on the fact that much of the world was in lockdown in 2020 and going into 2021.
It's true that Zoom benefited significantly from the rise of virtual work in 2020. After all, revenue for the company's fiscal 2021 (a fiscal year ending Jan. 31, 2021) skyrocketed 326% year over year. But investors should note that the trend of using video to collaborate virtually was already extremely strong before the pandemic; fiscal 2020 revenue rose 88% year over year. Growth at the time was particularly strong from large customers. Zoom's customers contributing more than $100,000 of trailing-12-month revenue increased 86% year over year in the fourth quarter of fiscal 2020.
The same goes for Peloton. The company certainly benefited from the pandemic, but revenue during the quarter ending Dec. 31, 2019 was growing at a year-over-year rate of 77%, with connected fitness subscribers increasing 96% year over year.
Continued momentum
The underlying catalysts driving Zoom and Peloton are both still alive and well. Strong growth persists at both companies.
Despite facing extremely tough comparisons in the year-ago quarter, from when both companies were benefiting from soaring demand amid lockdowns, Zoom's and Peloton's revenue in their most recently reported quarters grew 191% and 141% year over year, respectively.
Looking ahead, Zoom notably guided for fiscal 2022 revenue of nearly $4 billion, up from fiscal 2021 revenue of about $2.7 billion.
Boding well for Peloton's continued momentum, management said in its most recent quarterly update that its monthly average workouts per connected fitness subscription rose to an all-time high, showing how the company's products are still yielding high engagement even as the economy reopens.
Healthy profits
Finally, another factor that makes these companies unique from many other growth stocks is that they are already very profitable. Zoom generated $873 million of net income on $3.3 billion of trailing-12-month sales, and Peloton served up $213 million of net income from $3.7 billion in revenue.
Substantial profits give these companies an edge when it comes to reinvesting in growth opportunities ahead of them and spending on efforts to enhance their competitive positioning and first-mover advantages in their respective industries.
While there's no guarantee these two stocks will beat the market over the next 10 years, their recent momentum -- before, during, and after the worst part of the pandemic -- suggests they likely have a promising future.
