Compounding is a powerful force that can significantly increase the value of your investment portfolio. For compounding to occur, a business needs to demonstrate consistent growth in revenue and profits, thereby allowing its share price to increase in tandem. Profits are then plowed back into the business and reinvested at high rates of return to help bring the business to the next level. Over time, this virtuous cycle will cause the stock price to shoot up, helping to multiply your wealth many times over.
For a stock to be a long-term keeper, you also need to look for other attributes such as a strong brand or market position within its industry, a stellar track record of growing its presence and/or customer base, and catalysts such as a large total addressable market to ensure many more years of steady growth.
With these characteristics in mind, these two growth companies qualify as stocks you should own for a decade or more.
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1. Chipotle Mexican Grill
Chipotle Mexican Grill (CMG 2.41%) is a Mexican restaurant chain with over 3,200 restaurants in the U.S., Canada, the U.K., France, and Germany as of March 31 this year. The company has demonstrated resilience and managed to grow both its top and bottom lines throughout the pandemic by pivoting to online orders and takeaways. From 2020 to 2022, Chipotle saw total revenue rise from $6 billion to $8.6 billion, with net income more than doubling from $355.8 million to $899.1 million over the same period. To top it off, the Mexican restaurant operator also generated an average positive free cash flow of $658 million over these three years.
This strong performance can be attributed to management's savviness in pivoting to mobile and digital sales in 2019. This move greatly benefited the company during the pandemic years as it managed to garner sales through BOPIS (buy online, pick up in store), deliveries, and takeouts. Back in 2019, Chipotle started converting its stores to include a "Chipotlane," or a mobile order pickup window. By November last year, Chipotle celebrated the opening of its 500th restaurant with a Chipotlane. In 2019, digital sales accounted for just 18% of total sales, but by 2021, this percentage had ballooned to 45.6%.
The company's strong performance has continued into the first quarter of 2023, with revenue increasing by 17% year over year to $2.4 billion and comparable restaurant sales jumping 10.9% year over year. Net income soared 84.2% year over year to $291.6 million, with free cash flow climbing 79.2% year over year to $334.7 million for the quarter. Chipotle has also grown its store count steadily, going from 2,600 restaurants at the end of 2019 to over 3,200 at present. For 2023, Chipotle expects to open 255 to 285 new restaurants and add a Chipotlane for 10 to 15 stores. With management's savvy and the company's robust track record of steady expansion, Chipotle is a stock you can hold onto for the long term.
2. The Trade Desk
The Trade Desk (TTD 1.67%) offers a cloud-based platform for advertisement buyers to help them create and manage their digital advertisement campaigns across various formats and devices. The company has not only been consistently profitable since 2013 but has also seen its revenue grow by leaps and bounds over the years. Revenue stood at just $114 million back in 2015 and shot up more than 13-fold to $1.58 billion in 2022. The Trade Desk carries zero debt on its balance sheet and is unaffected by the recent surge in interest rates. The business also generated an average free cash inflow of $366.8 million for 2020 to 2022.
For the first quarter of 2023, The Trade Desk's strong performance has continued. Revenue saw a 23% year-over-year jump in revenue to $383 million with an over 95% customer retention rate, a testament to the stickiness of its service. Management believes that it is still early days for it to tap into a large retail media opportunity and that there is still significant opportunity for international growth. The Trade Desk is looking at a total addressable market of around $135 billion for just digital media alone. If the pie is expanded to include total global ad spending, the addressable market balloons to approximately $830 billion, providing ample opportunity for the company to continue growing its top line.
Just last month, The Trade Desk launched its new media buying platform, Kokai, which incorporates the latest advances in artificial intelligence. Kokai makes use of deep learning across the entire digital media purchase process to help advertisers select the right ad impressions to reach their target audience. The platform also offers retail measurement data and streamlined partner integrations along with a new user experience, increasing the attractiveness of this service to existing and potential customers. With these attractive operating and financial attributes, The Trade Desk possesses a long growth runway that can help compound your portfolio over the next decade.
