Projecting a company's future growth is a great way to figure out which businesses can meaningfully expand over the long run and increase wealth and which ones are simply over-hyped.
Let's look at a pair of hot growth stocks whose underlying businesses probably have what it takes to triple your investment before the close of the decade. While one of them could be a risky investment, both have credible paths to making shareholders a richer.
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1. Novo Nordisk
Novo Nordisk (NVO -0.78%) is a Danish pharma company that's been in the news lately, thanks to its drug semaglutide. The Food and Drug Administration (FDA) approved the drug in the U.S. for treating obesity, which sells under the trade name Wegovy. Additionally, semaglutide is also approved to treat type 2 diabetes and sold under the trade names Ozempic, an injectable, and Rybelsus, a pill.
Currently, the company's investigating semaglutide for other indications as well, like Alzheimer's disease, in late-stage clinical trials. And if the fact that its obesity care segment grew by 84% in 2022 means anything at all, it's that this company has a lot of growth on the way.
Over the last 10 years, Novo Nordisk grew its annual diluted earnings per share (EPS) at an average of 10.1% per year, reaching $3.59. Now, thanks largely to its anticipated semaglutide earnings, Wall Street analysts predict that, on average, its long-term EPS growth rate will be 20.7% annually. At that pace, its 2022 net income of $7.8 billion will expand to around $26.7 billion by 2030. And if its price-to-earnings (P/E) ratio remains at 44.2, its market cap could surpass $1.1 trillion -- more than triple its current value of $354 billion.
So, in principle, Novo Nordisk stock could indeed triple over the next 6.5 years. But that doesn't mean you should bet the bank on it happening. Even with a portfolio of great products, growing earnings by roughly 20% per year for more than half a decade is quite difficult for a large and established business.
Plus, there's always the chance that market phenomena will cause its P/E ratio to compress, meaning it would take a significantly faster pace of net income growth to still triple in value relative to today. Nonetheless, this stock isn't very risky thanks to its in-demand medicines and the likely output of its development pipeline. So don't be too afraid to buy a few shares, as a purchase will probably pay off over the coming years.
2. SNDL
SNDL (SNDL 3.52%) is a Canadian cannabis and liquor business that doesn't exactly have a hit drug like semaglutide to sell. Instead, SNDL's path to tripling by 2030 involves it surviving a decidedly toxic cocktail of market and economic factors that currently appear to be harming its competitors to the point that they will be relatively easy to buy out.
In a nutshell, it's a bad time to be a cannabis company. After experiencing a brutal collapse from the frothy frenzy of 2021, the market presently has shunned cannabis stocks. Most public businesses in the industry are unprofitable, and the piecemeal nature of marijuana legalization in the U.S. remains a major stumbling block.
More importantly, the North American marijuana markets are being punished by companies lowering cannabis prices because of excess weed floating around compared to the level of demand. There are too many goods chasing too few consumers.
But for a business like SNDL, these conditions make for the perfect setup. It currently has CA$207 million in unrestricted cash on hand and no debt. Due to significant impairments from its last set of acquisitions, it isn't profitable; however, it made CA$28.6 million in cash from operations in the fourth quarter, and its cash balance only dropped by CA$6.7 million in 2022.
At the same time, as a result of some of its prior investments and lending to other U.S. marijuana companies, it could gain a majority owner of one or two of the multi-state operators (MSOs) there. That could power its top line to surpass CA$1 billion before the end of 2023, up from 2022's sum of CA$712.2 million.
To triple, SNDL's market cap would need to reach approximately 1.2 billion U.S. dollars, up from its market cap near $400 million today. But right now, its price-to-sales (P/S) ratio is only 0.6, far lower than most of its competitors, not to mention the market's average P/S of 2.4. Let's assume it succeeds with its plans to gain control of a U.S. MSO or two so that by the end of 2023, it will reach CA$1 billion in sales, which is actually a bit lower than analysts' estimates.
If it can then simply grow its annual revenue by a measly 8.5% annually over the six years following 2023, it'll easily triple to reach a market cap of $1.2 billion, provided its P/S expands a bit to reach a still-super-low value of 1.0. But if its valuation corrects to a level merely in the ballpark of the market's average, it could triple while growing even slower -- and with acquisition opportunities abounding, growing slower is unlikely. Still, its shares could also lose a lot of value between now and 2030, thanks to the difficult market conditions. So don't buy it unless you're brave.
