Growth stocks are an essential piece of any investment portfolio, especially for long-term investors who want to maximize their returns. Many growth stocks are high-risk, high-reward opportunities, and their investors often have to stomach expensive valuations, significant volatility, and uncertainty regarding the company's ability to execute far into the future.
These two stocks offer a more balanced approached for the long term. They're established market leaders with strong competitive advantages, and they still have the potential to outperform the market over the next 10 years.
Workday
Workday (WDAY -1.19%) provides a cloud-based software suite with HR management and financial functions. Its target customers are enterprises that need to manage resources across large and complex organizations, and the right software is necessary to accomplish that. Workday continues to invest in product enhancements, and it's currently focused on developing artificial intelligence and machine learning capabilities to bolster and solidify its competitive position.
Image source: Getty Images.
The company isn't growing at the blistering pace that it boasted in previous years, but it's still expanding at a respectable rate despite a challenging macroeconomic environment. Revenue expanded 16% year over year in its most recent quarter.
Data by YCharts.
Workday's growth rate is falling as it reaches larger scale and heavier market saturation. However, the company is delivering impressive results in other important financial metrics. Its gross margin is rising as highly profitable subscription services generate an increasing share of total revenue relative to low-margin professional services. Workday's focus on prudent expense management has pushed the company into profitability, and its free cash flow continues to charge higher.
Data by YCharts.
Workday has become a critical partner for many large businesses, and that presents the advantage of high switching costs. With customers who are reluctant to switch to competing providers, Workday enjoys a wide economic moat, making it a reliable long-term addition to a growth portfolio.
The stock's forward price-to-earnings (P/E) ratio is a little under 40 as of this writing, so it's not cheap. But with analysts forecasting 30% annual earnings growth over the next five years, its price/earnings-to-growth (PEG) ratio is 1.3. That might not make it a value play, but investors buying Workday for the long haul can still look forward to attractive return potential without the sky-high valuation associated with many of its fast-growing peers.
Salesforce
Salesforce (CRM 0.42%) provides a suite of cloud-based customer management, sales, and marketing software solutions. Through years of acquisitions, it's added high-profile applications such as Tableau, Slack, and MuleSoft, making the breadth and quality of its offering unrivaled in its target market.
The company shares several key characteristics with Workday. It provides a comprehensive set of enterprise software tools that are deeply embedded in sales operations and burdensome to switch. Its continued focus on product improvements puts its offering in the top class of its industry, and it has an exceptionally sticky relationship with subscribers.
Salesforce.com is also dealing with a slowing sales growth rate, but it's still expanding at a respectable pace each year. It reported 11% growth in its most recent quarter. That's disappointing, given its performance a few years ago, but many businesses would envy that metric. There's also a good chance that revenue will accelerate when market conditions improve, even if it doesn't manage to reach prior peak levels.
Data by YCharts.
Salesforce has also pivoted to a profitability focus to deliver value to shareholders. It's achieved noteworthy improvements in operating profit margin and free cash flow over the past few quarters. Those are excellent signals about the company's potential efficiency and pricing power, and it confirms that previous losses were really due to investments meant to spur growth.
Data by YCharts.
As with Workday, Salesforce is an established company, and the stock is unlikely to deliver explosive returns. However, trading at a reasonable 25 times forward earnings, it can be a reliable anchor for a growth portfolio that has the potential to outpace the market over the next decade.
