Over short periods, Wall Street is completely unpredictable. Since the start of 2020, we've witnessed the major indexes bounce back and forth between bear and bull markets.
However, things become much clearer when examined over longer periods. For instance, holding an S&P 500 tracking index for 20 years has been a foolproof moneymaking strategy when back-tested more than a century. For long-term-minded investors, it means buying and holding innovative businesses over extended periods can lead to serious wealth creation.
At the moment, three unparalleled stocks have the potential to make patient investors meaningfully richer. If you have $250,000 to put to work, and you won't need this capital for bills or emergencies, the following three magnificent growth stocks can turn an initial $250,000 investment into $1 million by 2035.
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Etsy
The first unrivaled growth stock that can quadruple a $250,000 starter investment and make long-term investors millionaires by 2035 is e-commerce platform Etsy (ETSY 0.34%).
With the worst of the COVID-19 pandemic now (hopefully) in the rearview mirror, Etsy's sales have slowed and the company is facing some very difficult year-over-year comparisons. To boot, skeptics would suggest that the e-commerce arena is only getting more competitive. Thankfully, Etsy has the tools and competitive edges needed to stand out.
Although Amazon is the undisputed king of online retail sales, it's not a true competitor to what Etsy offers. Amazon is all about volume and logistics. Meanwhile, Etsy's advantage can be seen in its merchant base, which consists of self-proprietors and small businesses that are focused on unique products and customizing/personalizing the shopping experience. I'd argue there isn't an online retailer that offers the level of personalization at scale that Etsy brings to the table. This unique advantage is only set to grow over time.
Something else Etsy does particularly well is draw in new and former buyers, as well as encourage its top buyers to spend more. Both new and reactivated buyers are substantially higher than before the COVID-19 pandemic, while the 7.1 million habitual buyers in the June-ended quarter represents a 218% increase from June 2019. Habitual buyers make at least six purchases over the trailing-12-months, with the aggregate of these buys totaling $200. They're the heart and soul of Etsy's growth and comprise 43% of its gross merchandise sales (GMS).
Another reason Etsy has a good shot at long-term success is the willingness of its management team to reinvest in its operations. The company has beefed up its omnichannel advertising campaign, is leaning heavily on video advertising to engage potential buyers, and is constantly upgrading the quality of its search function to improve buyer follow-through.
Ultimately, if Etsy's merchant base is growing, it should have no trouble steadily increasing its take-rate as a percentage of GMS. A sustained double-digit earnings growth rate should be the expectation through at least 2030.
Fastly
A second magnificent growth stock that can increase a $250,000 initial investment by 300% and turn it into a cool $1 million in 12 years is edge computing company Fastly (FSLY 4.43%).
There's no question that Fastly's valuation got ahead of itself during the COVID-19 pandemic. Shares of the company skyrocketed roughly tenfold in less than a year on the premise that work from home and increased cloud spending would fuel its growth.
The problem is that investments in its own infrastructure, coupled with rapidly rising stock-based compensation, ballooned Fastly's losses, which clobbered its shares during the 2022 bear market. But with a well-defined growth strategy and new leadership in place, Fastly is, once again, on the fast-track to making its patient shareholders richer.
The top catalyst for Fastly continues to be the expansion of enterprise data-center spending. Businesses were already moving their data online and into the cloud prior to the COVID-19 pandemic -- it's simply accelerated since then. Further, the rise of artificial intelligence (AI) offers another channel for businesses to invest aggressively. Since Fastly is best-known for its content delivery services to end users, it suggests that usage is going to steadily climb.
Despite the challenges it's faced, most of Fastly's key performance indicators are moving in the right direction. Between Sept. 30, 2021 and June 30, 2023, Fastly has added more than 200 customers, has seen its average enterprise customer spend increase 16% to $809,000, and has delivered a dollar-based net retention rate (DBNER) ranging from 118% to 123% over the trailing eight quarters. DBNER demonstrates that existing customers are consistently spending between 18% and 23% more on a year-over-year basis.
But the most important puzzle piece for Fastly is the change that was made in the leadership department. In September 2022, Bob Nightingale took over as CEO. Nightingale came over from Cisco Systems, where he was the executive vice president of Cisco's Enterprise Networking and Cloud division. He's a no-nonsense leader who's not afraid to trim costs and who understands where Fastly's growth opportunities lie. Under Nightingale's tenure, Fastly's forward-year loss estimates have shrunk significantly. It's possible the company could be recurringly profitable as early as next year.
With a compound annual earnings growth rate of 30% forecast by Wall Street over the next five years, Fastly looks to be just getting started.
Image source: Getty Images.
CrowdStrike Holdings
The third magnificent growth stock that can turn $250,000 into $1 million by 2035 is none other than cybersecurity company CrowdStrike Holdings (CRWD 2.03%).
Arguably the biggest "issue" with CrowdStrike, if you want to call it that, is its premium valuation. If multiple predictive indicators are correct and U.S. economic growth slows, stalls, or reverses in the coming quarters, investors are probably going to be less willing to throw their support behind businesses that are trading at roughly 47 times forward-year earnings. That's more than twice the forward price-to-earnings ratio of the benchmark S&P 500.
But if there's one thing CrowdStrike has shown in its four-plus years as a publicly traded company, it's that it's worth penny of its premium, if not more.
The beauty of cybersecurity stocks is that they offer what's effectively a necessity service. Hackers and robots aren't going to take time off from trying to steal sensitive information just because the U.S. economy is struggling or Wall Street had a bad day. This means businesses with an online or cloud presence are increasingly relying on third-party providers for protection.
CrowdStrike's cloud-native Falcon security platform is what makes this company tick. Falcon is an AI- and machine-learning-driven platform that oversees trillions of events each week. It uses these events to become smarter and more efficient at recognizing and responding to potential threats to end users over time. Despite being costlier than most of its competition, CrowdStrike's software-as-a-service solutions are commanding a retention rate of 98%!
Something else CrowdStrike does exceptionally well is encourage its existing users to spend more. As of July 31, 2023, 63% of its subscribers had purchased five or more cloud-module subscriptions. A little over six years ago, just a single-digit percentage had purchased at least four cloud-module subscriptions. Add-on sales are the not-so-secret reason CrowdStrike's adjusted subscription gross margin reached 80% during the first-half of fiscal 2024 (CrowdStrike's fiscal year ends on January 31).
With adjusted margins this high, it's no surprise that Wall Street expects CrowdStrike's compound annual earnings growth rate to top 40% over the next five years.
