What's amazing about investing in the stock market is that you can double, triple, 5x your money or better by simply buying stocks and waiting.
Looking for stocks that can double is a reasonable goal for most investors, especially if your time horizon is long enough. Considering the S&P 500 has historically generated an average annual return of 9% (when including dividends), the broad market index would typically double every eight years.
If you're looking for stocks that will double even faster than that, you're likely going to be focusing on growth stocks. For a stock to double in five years, it would have to increase in price by 15% each year. Different kinds of factors support stock growth. It all depends on the type of stock. But one factor that's almost always required for a stock to double is revenue growth.
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Why revenue growth is key
A variety of factors can influence the growth of a stock, including profit growth, dividend growth, improving margins, share buybacks, or qualitative factors like an acquisition, new product, leadership, or the emergence of a growth market.
However, one thing almost all stocks that double have in common is revenue growth. Revenue growth is the most popular and easiest way to measure the growth of a business. While not all revenue growth is profitable or leads to profits, revenue growth tends to be much smoother than profit growth as a number of factors can influence profit growth from quarter to quarter, which generally makes it lumpier than revenue growth.
Ultimately a stock price is a reflection of earnings and the potential of those earnings to grow over time. However, earnings can't grow without revenue growth, so it's important to look at revenue growth first, as some growth stocks can double without any profits.
Amazon (AMZN -1.65%), for example, became one of the best-performing stocks over the last generation largely because the company was able to deliver consistently strong growth. Its bottom-line performance, on the other hand, has been erratic, and though the company now puts up strong profits thanks to Amazon Web Services, its cloud computing division, profits fell substantially last year, even as revenue growth continued.
For growth stocks, even unprofitable revenue growth can be a good sign because, depending on the business, that additional revenue can eventually be converted into profits.
Keep an eye on valuation
Revenue growth alone isn't enough to make a stock double. The company has to grow fast enough to justify its valuation. If it's too expensive, even strong revenue growth won't make the stock grow.
One example is Snowflake (SNOW -1.61%), the fast-growing data warehousing specialist that launched its IPO in 2020 but whose share prices have fallen since its debut.
As the chart below shows, Snowflake has delivered strong revenue growth throughout its publicly traded history, but the stock has been so expensive that shares have fallen since then, as the chart below shows.
As you can see, Snowflake's year-over-year revenue growth is still stellar at 67% in its most recent quarter, but its valuation was so high that the stock is down substantially. Even today, the stock is expensive at a price-to-sales ratio of 26, meaning that its revenue growth will have to remain strong for the stock to double from here.
There's no magic formula for what revenue growth is needed at what valuation in order for a stock to double, but investors should compare a stock like Snowflake to its peers to see how its revenue growth and valuation match up. Additionally, it's worth taking a look at analyst estimates as topping estimates is another key determinant for stock growth and finding a stock that can double.
If you're investing in growth stocks, 20% revenue growth is a good minimum standard to look for. If a company can maintain 20% revenue growth, or better, over a period of several years and demonstrate the potential for profits, if not outright profitability, the stock has a good chance of doubling, assuming the valuation is reasonable.
