Investing in companies that produce growing profits over many years is the best way to build wealth. You want to find consistent performers so you can sit back and do as little as possible. That way, you delay paying taxes on your capital gains and can let compound interest work its magic.
With that in mind, here's why PayPal Holdings (PYPL 0.64%) and RH (RH 1.32%) (formerly known as Restoration Hardware) are two reasonably valued growth stocks that should deliver market-beating returns in the next decade.
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PayPal
PayPal is a leader in digital payments. You'll find its checkout button everywhere at various online stores. It has 416 million active customer accounts, which increased 15% year over year in the third quarter.
However, the stock is down 34% over the last three months. Investors can blame a soft fourth-quarter revenue outlook. PayPal posted 13% growth last quarter and told investors revenue should increase 18% in the current period on a currency-neutral basis.
Market participants were looking for stronger growth in the near term, especially with the stock trading at a high forward price-to-earnings (P/E) ratio of 50 times leading up to the third-quarter report.
Despite the sell-off, there's nothing wrong with PayPal's business. It processed $310 billion worth of transactions last quarter, representing an increase of 24% year over year -- consistent with its pre-pandemic trend.
Analysts have expressed concern about growing competition from Square's Cash App, Apple Pay, and other digital payment providers, but PayPal's brand ubiquity is being greatly discounted.
It just announced a partnership with Amazon that will allow Venmo users to shop with their accounts on Amazon. PayPal CEO Dan Schulman called this "a significant moment" in the company's efforts to monetize its popular peer-to-peer payments app.
PayPal also now offers the ability to invest in cryptocurrency through its apps, which should appeal to customers who want to buy digital currencies.
The stock currently trades at a more reasonable valuation of 41 times forward earnings estimates. It's not cheap, but it's also not expensive for an industry-leading company that has increased adjusted earnings per share at a compound rate of 21% over the last two years. This is a good opportunity to invest in one of the top brands benefiting from the digital payments megatrend.
Image source: Getty Images.
RH
RH is led by visionary CEO Gary Friedman, who is turning the furniture store into a high-end luxury brand that produces stellar growth and profit margins. RH's performance has been impressive enough to win a spot among the holdings of Warren Buffett's Berkshire Hathaway.
The company turned in another impressive quarter recently with revenue up 19% year over year and adjusted operating margin improving to 27.7%. Furniture stores are typically cutthroat businesses that don't earn high margins, but RH is a different breed.
Its stores are decked out with chandeliers, courtyards, fountains, and elegant rooftop restaurants. It also doesn't hurt that it sells artisan furniture at premium prices.
The stock is up almost 1,800% over the last five years, so how is it still a buy?
RH still has a large international growth opportunity, and the stock's valuation still doesn't fully account for its expansion potential. Management expects to reach $25 billion in revenue long term (it generated $3.7 billion in the past 12 months).
What's more, investors can buy shares at a forward P/E of 23, which is not much higher than the average stock. RH's future opportunities to open more galleries that earn high returns on investment make it a top luxury stock. Investors who buy and hold over the next decade should do well.
