It's always a good idea to invest in companies that have exceptional long-term growth potential. Paying a reasonable price for that growth is important, though, as overpaying for a hot growth stock can cost you dearly if the best-case scenario fails to play out.
While General Motors (GM 0.48%) and Akamai (AKAM -0.11%) may not be obvious picks for growth stocks, both have impressive growth potential over the next decade.
General Motors
Automaker GM is setting its sights on becoming a much larger company this decade. By betting big on electric vehicles, autonomous driving, and software, GM is targeting annual revenue of between $275 billion and $315 billion by 2030. That's about double the revenue it generated in 2022.
Electric vehicles (EVs) are a big part of the plan. By 2025, around $50 billion of annual revenue is expected to be coming from EVs. GM expects to be capable of manufacturing around 1 million EVs annually in North America by that year and sees operating margin for its EVs reaching a low- to mid-single-digit percentage.
Software and services have the potential to contribute between $20 billion and $25 billion of revenue by 2030, and GM expects this category to grow by 50% annually this decade. Software will be the key to improving GM's profitability. The company sees overall operating margin reaching a range of 12% to 14% by 2030, partly thanks to a 20% operating margin tied to new businesses.
Cruise, GM's autonomous driving subsidiary, is targeting $50 billion of revenue on its own by 2030. Cruise is already operating its driverless car service in parts of San Francisco, Austin, and Phoenix. There have been some issues, like a low-speed collision with a bus in San Francisco, and there are likely more kinks to be worked out. But the long-term potential is enormous.
GM's strong profitability is helping to fund all these initiatives. The company expects to produce net income between $8.4 billion and $9.9 billion this year, along with adjusted automotive free cash flow between $5.5 billion and $7.5 billion.
With a market capitalization of just $44 billion, the stock market is extremely pessimistic. While the company's results will certainly ebb and flow with the state of the economy, GM's solid financial performance and enticing long-term growth prospects make the stock a buy.
Akamai
Content delivery network provider Akamai doesn't look like much of a growth stock right now. Revenue grew by just 1% year over year in the first quarter, and earnings dropped on higher costs.
But it's Akamai's long-term ambitions that make the stock interesting. Akamai acquired cloud computing provider Linode in March of last year. Linode is similar to DigitalOcean in that it's aimed at developers. Unlike the big cloud platforms like AWS, though, Linode offers a small set of core cloud computing services with simple and predictable pricing.
Akamai is expanding the number of "core" computing sites in its network, which offer all of Linode's cloud computing services. The company is also building dozens of "distributed" sites in areas that are underserved by the big cloud platforms. These smaller sites will offer a subset of cloud computing services and will be integrated into the company's existing edge computing network.
Revenue from computing services was $116 million in Akamai's first quarter, less than 13% of its total revenue. The company sees computing contributing about $500 million of revenue for the full year, and that number has the potential to grow significantly over time. Akamai has ramped up its capital spending considerably as it grows its data center footprint this year. The computing business should be able to grow at a double-digit rate for the foreseeable future.
While it will take time for Akamai to return to stronger growth overall, the company remains highly profitable. Adjusted operating margin hovers just below 30%, and free cash flow is still positive, even with the elevated capital spending. Akamai isn't the cheapest stock, trading for around 16 times forward earnings, but its long-term growth story looks promising.
