If you invested $5,000 just one time, and averaged an annual return of 10% on that investment, in 50 years, that holding would be worth about $587,000. And 10% is around the historical average annual return of the stock market, as measured by the S&P 500 index. But adding a few promising growth stocks to a diversified portfolio could sweeten those results even more. For example, with a 12% average annual return, that initial $5,000 seed would grow into more than $500,000 in 41 years.
There are a lot of promising companies out there, which can make choosing investments feel overwhelming. Here's why I would be comfortable putting my money into DocuSign (DOCU -0.76%) and Alphabet (GOOG 0.60%) (GOOGL 0.57%) and leaving it with these two stocks for decades.
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The case for DocuSign
DocuSign has helped popularize the use of electronic, digitally signed documents, and its services have been in much higher demand since COVID-19 arrived. Through a cloud-based system, DocuSign not only reduces the amount of time businesses and individuals need to spend on reading and signing contracts and other business documents, but its eSignature product can be tailored for industry-specific needs and works with dozens of languages. In cases where a transaction is required, a document can also be configured to receive payments via credit cards or digital payment services like Apple Pay. And those are just a few features that DocuSign offers.
The company now has more than 1 billion users worldwide. Revenue has exploded over the last few years, nearly tripling to $2.1 billion.
When the pandemic began, businesses were scrambling to adopt cloud-based solutions. Now, as conditions are shifting back toward pre-pandemic norms, investors have been expecting that DocuSign's growth could slow. But the company still reported 35% year-over-year growth in its fiscal fourth quarter, which ended Jan. 31. That's plenty of growth to support the stock's price-to-earnings ratio of 39 at the current quote of around $78 per share.
"At over $2 billion in annual revenue, we believe we're still very early in the first 10% of the $50 billion Agreement Cloud market opportunity," CEO Dan Springer said on the fiscal Q4 earnings call on March 10.
The stock could be very rewarding off these lows, but considering its volatility over the last year, it could easily decline further before heading higher. Remember, successful investing is about holding shares of growing companies over periods measured in decades. It can take a while for the market to catch up to the fundamentals of a growing business. As Benjamin Graham -- the father of value investing -- has been quoted as saying: "In the short run, the market is a voting machine, but in the long run, the market is a weighing machine."
The most important thing to remember here is that DocuSign has brand recognition in its market. It is growing revenue, and the CEO sees a long runway for more growth as more businesses adopt its solutions. In all likelihood, DocuSign will be a more valuable business in 10 years than it is today.
The case for Alphabet
The Google search engine is basically a toll bridge to the internet. That makes owning it an incredibly powerful competitive advantage for Alphabet. It monetizes search and other widely used apps, like Gmail and Maps, with advertising, which provides about 92% of its total revenue. The remainder comes from its fast-growing cloud services business and its "Other Bets" business unit. In the fourth quarter, revenue from Google services, which also includes ad sales on YouTube, grew by 31% year over year to $69 billion.
A strong competitive moat and solid growth are exactly the features that long-term investors should be looking for, and Alphabet has them in spades. And it's a player in the tech hardware space, too, with Pixel phones, Chromecast with Google TV, and Google Nest home security products.
All these services and products are so entrenched in people's lives that it's difficult to envision a world without Alphabet. The company has spent more than $100 billion over the last five years to protect and widen its competitive lead with technologies like artificial intelligence, which it employs to improve search results and advertising effectiveness.
Even after those investments, Alphabet is highly profitable. It generated $67 billion in free cash flow in 2021. With the stock trading at 27 times free cash flow, it should deliver returns over time that at least mirror the historical return of the market, given the rate at which the company's revenue is growing.
How to proceed
If you're not comfortable putting $2,500 into each of these stocks immediately, consider dividing your investment up into smaller purchases over several months. That will allow you to take advantage of dollar-cost averaging -- a sensible way to invest if you believe in the long-term future of a company but want to limit the impact of its short-term price swings on your cost basis.
