Equipment-rental company United Rentals (URI -0.81%), advertising-technology company The Trade Desk (TTD 0.59%), and law enforcement solutions provider Axon Enterprise (AXON 1.48%) are three stocks that have turned investments of $5,000 into $70,000 in value, or more, over the past six to 12 years. And I don't know about you, but my portfolio could use a shot of something like that right now.
Long-time shareholders of these companies are richer today for tangible reasons. United Rentals, The Trade Desk, and Axon Enterprise are creating shareholder value via their real-world business successes. And while there's no guarantee that future results will be as good as the past, these companies have what it takes to generate future market-beating gains. Here's why.
1. United Rentals
United Rentals is the boring tortoise that beats the hare by a mile in the end. The company rents out equipment (think forklifts and worksite storage units) across the U.S. and Canada and has steadily grown revenue at a modest pace. However, management is particularly skilled at generating and growing free cash flow (FCF), which it frequently uses to repurchase shares. This in turn has dramatically increased its earnings per share (EPS) over time, as the 10-year chart highlights.
United Rentals may be a boring company, but this formula is a powerful one for market-beating investments. And it's largely why a $5,000 investment made in 2010 is worth over $100,000 today. The question new investors should consider is whether this formula can continue. I believe it can.
First and foremost, United Rentals can increase its revenue going forward. Consider that the company only has 15% market share and 71% of the market is comprised of small players. Not only can it occasionally use FCF to acquire other companies (as it did when it bought General Finance last year for $1 billion ) but it can also get more market share by being a more compelling option for its customers. Keep in mind its market-share growth is already happening -- it only had 13% market share in 2019.
If United Rentals grows its revenue over the next five to 10 years, I expect this management team to keep doing what it's done: generating FCF and repurchasing shares. Be aware that its revenue could be hampered by a broad economic slowdown (revenue fell during the Great Recession). But it's still the top dog in the equipment rental space and will be there when demand returns.
Buying back shares increases EPS. And when EPS goes up over the long term, the share price follows. It's not a one-to-one relationship -- if EPS doubles that doesn't necessarily mean the stock price will exactly double. But the strong correlation between EPS and share price is demonstrable over the long history of the stock market, as the following chart for the S&P 500 shows.
2. The Trade Desk
EPS may drive stock performance over the long term, but revenue growth isn't irrelevant. An outsize top line can lead to future earnings growth when the business model makes sense. And adtech company The Trade Desk has revenue growth in spades. In 2016, the year it went public, the company generated $203 million in full-year revenue. Fast forward five years and The Trade Desk just reported $315 million in revenue in the first quarter of 2022 alone.
The Trade Desk has grown revenue primarily because it's in a high-growth industry. The company estimated that in 2016, only $19 billion of global ad spend was spent on programmatic ad platforms like The Trade Desk. But according to eMarketer, the programmatic ad market in the U.S. alone is now worth over $100 billion.
Programmatic advertising can be superior to traditional methods because results can be measured. And this means that The Trade Desk is likely to continue growing its top line for a long time. After all, with only about $1.3 billion in trailing-12-month revenue, it only has a sliver of the overall market.
The Trade Desk wasn't profitable in Q1 because general and administrative expenses have surged higher to reward workers for their success so far. This expense should mitigate in time. Consider that in 2020, the company had a net profit margin of 29%, which shows what this company is capable of when trying to optimize for profits.
Considering its long runway ahead and potentially lucrative business model, The Trade Desk can grow revenue and EPS significantly in the decade to come. I believe that will make it a good investment in the future like it's been in the past. Speaking of which, if you had invested $5,000 when it came public in September 2016, it would be worth over $70,000 right now, even though the stock is currently down over 50% from its all-time high.
3. Axon Enterprise
Finally, there's Axon Enterprise. If you invested $5,000 in this stock 10 years ago, you'd have over $80,000 now.
Axon Enterprise was a notably different company 10 years ago than it is today and it accomplished incredible returns for shareholders by drastically reimagining its business. It used to just sell its Taser devices to law enforcement officers, producing sales that came irregularly and limiting room for profit-margin growth. However, the company began to develop software. And now it typically sells hardware devices like Tasers as part of a subscription package, making the business far more predictable.
Financial results for the first quarter of 2022 demonstrate how Axon's business has evolved. In Q1, Taser sales accounted for almost 45% of revenue, and 45% of Taser sales were attached to a recurring-revenue bundle. And over the past 12 months, over half of Taser sales were part of a subscription package.
The rest of Axon's revenue came from other hardware devices like body cameras and from software solutions like Axon Cloud. And when you add it all up, the company now has $348 million in annual recurring revenue as of Q1, up 44% from the same quarter last year.
Broadening the scope of its product offerings and introducing the subscription element has transformed Axon Enterprise into a winning stock. And there's very good reason to believe its growth engine is still purring. Consider that, as of Q1, it has nearly $3 billion in future contract revenue, up 66% from just $1.79 billion last year. In other words, the backlog is growing faster than revenue, which signals accelerating growth down the line.
Of course, things with the economy are uncertain right now. But Axon Enterprise appears ready for whatever comes. The company chooses to be cash-rich and not burdened with liabilities. It has $424 million in cash, equivalents, and investments and zero debt. So if macroeconomic conditions deteriorate, expect Axon to remain focused on its long-term future, whereas some competitors may have to pivot to a short-term survival mindset.
Here's to the future
It doesn't matter that United Rentals, The Trade Desk, and Axon Enterprise have beaten the market over a long period of time in the past. What matters is whether they can beat the market going forward. To this end, it's important to consider why these companies have succeeded -- they've grown their operations and made capital-allocation decisions that have benefited shareholders.
This is what it's going to take to beat the market going forward. And based on past performance, I think United Rentals, The Trade Desk, and Axon Enterprise have a strong chance to create more shareholder value yet again.