Many growth-focused investors have seen their portfolios get hammered recently. With inflation at a 40-year high and interest rate hikes on the way, consumer and business spending are likely to slow in the coming months, and that has Wall Street worried. As spending slows, corporate revenue growth will likely decelerate, which means those richly valued growth stocks now look even more expensive.
However, over the last decade the S&P 500 Growth Index has generated a return of 300%, crushing the 136% return of the S&P 500 Value Index and the 217% return of the broader S&P 500. That makes a compelling case for owning at least a few growth stocks, especially if you have a decade or two until retirement.
With that in mind, here are two investment ideas that could make you richer in the long run.
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1. CrowdStrike Holdings
CrowdStrike Holdings (CRWD -3.09%) specializes in cybersecurity. Its cloud-native platform features 22 modules, ranging from endpoint and cloud workload security to identity protection and threat intelligence. All of those modules are delivered through a single lightweight sensor, meaning clients can add new functionality without installing more software. That differentiates CrowdStrike from legacy vendors.
More importantly, CrowdStrike's ecosystem spans millions of endpoint devices, allowing its platform to capture trillions of security signals each week. It then leans on artificial intelligence and behavioral analytics to surface insights from those signals, helping clients detect and block even the most sophisticated attacks. That creates a network effect that keeps CrowdStrike on the bleeding edge of threat intelligence as its AI models become more predictive with each new data point.
Fueled by that competitive edge, CrowdStrike has come to dominate the endpoint security market. The company captured an industry-best 14.4% market share in 2021, according to the International Data Corp., up four percentage points from 2020. Over that time period CrowdStrike grew its customer base 65% to 16,325, and the average customer spent 24% more. Not surprisingly, that translated into strong financial results. In fiscal 2022 (ended Jan. 31), revenue surged 66% to $1.5 billion, and free cash flow rose 51% to $441 million.
Going forward, shareholders have good reason to be excited. CrowdStrike recently launched its Extended Detection and Response (XDR) module. XDR incorporates data from CrowdStrike and third-party vendors like Zscaler, Mimecast, and Okta, unifying security signals from endpoints, email, networks, and cloud infrastructure to accelerate threat detection and response. CrowdStrike XDR could be a significant growth driver for the company.
With that in mind, management puts its addressable market at $55 billion in 2022, but it believes that figure could rise to $116 billion by 2025, demonstrating the critical nature of cybersecurity. And given CrowdStrike's industry leadership, this growth stock looks like a smart buy for long-term investors.
2. Arista Networks
Cloud computing has changed the world. With a few clicks, businesses can provision compute and storage services through the internet, avoiding the cost and complexity of maintaining on-premise infrastructure. However, cloud computing also puts tremendous strain on data centers -- which, in some cases, may serve millions of people at the same time -- and traditional networking solutions weren't designed to handle that demand.
That's where Arista Networks (ANET -2.96%) can help. Its core innovation is the Extensible Operating System (EOS), a software platform that powers its entire line of switching and routing hardware, allowing clients to create a seamless network across public clouds and enterprise data centers. That differentiates Arista from vendors like Cisco Systems, a company that utilizes multiple different software products, making network management more complicated and costly for IT teams.
Of course, Cisco still leads the broader ethernet switching industry, but Arista has come to dominate the high-speed segment, meanings switches that offer throughput of at least 100 gigabits. That competitive edge has made Arista a cash-generating machine. In 2021, revenue jumped 27% to $2.9 billion, operating margin expanded 118 basis points to 31.4%, and free cash flow rose 32% to $951.1 million.
Going forward, Arista is well-positioned to maintain that momentum. In the future, cloud computing will become more common and applications will consume more data, meaning high-performance networking solutions will only become more necessary. In fact, the company puts its market opportunity at $35 billion by 2025, leaving plenty of room for growth. And given Arista's strong market position, this growth stock could make you richer in the long run.
