A tried and tested way of making money in the stock market is buying and holding solid companies for the long run. This strategy allows investors to capitalize on secular growth trends and helps them benefit from the power of compounding.
However, investors looking for outsized gains may want to look for fast-growing companies that have the potential to outperform the broader market. This is where growth stocks come in. Typically, companies that have developed disruptive products are capable of increasing their revenue and earnings at a much faster pace than the markets in which they operate, and this allows them to deliver above-average returns.
The following are three such companies that are growing at an impressive pace and also seem capable of sustaining their momentum in the long run, leading to potentially healthy gains for investors.
1. Confluent
Confluent (CFLT 2.98%) is scratching the surface of a massive opportunity within the data streaming market, which is worth an estimated $60 billion according to the company's estimates. By 2025, Confluent estimates that its addressable market could hit an impressive $100 billion. The company has generated $732 million in revenue in the trailing 12 months, which means that it has tapped just over 1% of its total addressable market.
By using Confluent's platform, customers can make real-time decisions by connecting their data instead of storing it in silos and processing it in batches later on. The company has been recording impressive growth in its customer base and is setting itself up to take advantage of the long-term opportunity at hand.
Confluent finished the third quarter of 2023 with 4,910 customers, an increase of 16% over the prior-year period. The good part was that the number of large customers increased at a faster pace thanks to higher spending. Customers with more than $100,000 in annual recurring revenue (ARR) were up 25% year over year to 1,185, while those with more than $1 million in ARR increased at a faster pace of 38%.
The company has forecasted full-year revenue of $768.5 million, which would be a 31% jump over the prior year. What's more, Confluent aims to sustain a 30% annual revenue growth rate over the long run, which it seems capable of doing considering the expansion of the market it operates in as well as the huge untapped opportunity.
If that's indeed the case and Confluent's top line increases at a compound annual growth rate of 30% through 2028 (using its estimated 2023 revenue of $768.5 million as the base), its revenue could hit $2.85 billion after five years. Confluent is currently trading at 10 times sales. Even if it trades at a discounted price-to-sales ratio of 5 after five years and hits $2.85 billion in revenue, its market cap could jump to more than $14 billion in 2028.
That would be double the company's current market cap, suggesting that investors could benefit big time from buying and holding this cloud stock over the long run.
2. ASML Holding
The global semiconductor market's size is anticipated to exceed $1 trillion in revenue by 2030, growing at an annual pace of 9% through the end of the decade. ASML Holding (ASML 2.04%) is one of the best ways investors can benefit from this huge end market given the company's positioning in the semiconductor industry.
ASML supplies chip-making equipment -- lithography machines, to be specific -- to semiconductor foundries and fabrication plants. Mordor Intelligence estimates that the size of this market could jump from an estimated $24 billion this year to $35 billion in 2028. This, however, is not the only big growth opportunity for ASML, as the company is the only supplier of extreme ultraviolet lithography (EUV) machines.
EUV machines are needed for making advanced chips using smaller manufacturing nodes. The demand for these chips is increasing at a tremendous pace thanks to their applications in multiple end markets, ranging from smartphones to computers to artificial intelligence (AI) servers. Not surprisingly, the market for EUV machines is expected to grow at a much faster pace as compared to ordinary lithography machines.
According to third-party estimates, the EUV market's revenue could jump fourfold by 2030 to $37 billion compared to this year's estimated revenue of $9.3 billion. That translates to a compound annual growth rate of almost 22%. More importantly, ASML is already benefiting from this solid opportunity. The company is forecasting a 30% jump in revenue in 2023, while analysts are anticipating its earnings to increase 34% to $21.27 per share.
The company is expected to clock annual earnings growth of 23% for the next five years. That would take its earnings to almost $60 per share in 2028. Multiplying the estimated earnings with ASML's average five-year forward earnings multiple of 35 indicates a stock price of $2,100 after five years. That's almost three times the current levels, making ASML a top semiconductor pick for the long run.
3. Twilio
The communications platform-as-a-service (CPaaS) market has been growing at a nice clip. Future Market Insights estimates that the global CPaaS market could generate $59 billion in annual revenue in 2032, up from just $6.4 billion last year. Twilio (TWLO 1.47%) is the leading player in this market with an estimated share of 24%, according to IDC.
However, the company is going through a rough patch. Macroeconomic headwinds have hurt spending on the company's offerings, which allow organizations to connect with their customers using Twilio's APIs (application programming interfaces). These APIs enable Twilio's customers to remove the need for physical contact centers. Customer service associates can simply install Twilio's APIs on a computer with internet, and connect with customers through multiple channels such as voice, text, and email, among others.
Given the many advantages of cloud-based contact centers (which Twilio enables) over physical contact centers, the slowdown in spending in this market should be temporary. It is also worth noting that the company is integrating new technologies such as AI into its CPaaS offerings, and this could give its growth a nice boost in the long run.
As such, investors looking to buy a potential growth stock may want to buy Twilio right away, especially considering that it is set to turn profitable this year. Twilio is expected to finish 2023 with non-GAAP earnings of $2.15 per share compared to a loss of $0.15 per share last year. What's more, analysts have raised their bottom-line growth expectations in recent months.
TWLO EPS Estimates for Next Fiscal Year data by YCharts
The chart above suggests that Twilio's earnings growth is likely to accelerate from 2025. The acceleration in the company's bottom line has been accompanied by a sharp turnaround in Twilio's fortunes on the stock market recently. The stock has surged 36% since the company released its third-quarter results on Nov. 8, and it seems capable of sustaining its momentum over the long run thanks to its improving earnings power. This gives investors a solid reason to buy the stock before it soars higher.
