You would be surprised at how much wealth you can generate by owning stocks for the long term. If you give the power of compound growth enough time to really gain momentum, your investments can multiply in value many times, leaving you better prepared financially for your retirement. Growth stocks can offer the best bang for your buck as their share price gains can help your portfolio growth stay ahead of inflation.
However, you shouldn't just buy any growth stock. There are several key attributes you should look for when selecting stocks for your portfolio. The business should possess a strong brand or franchise that will endear customers to it and make them sticky. It should also demonstrate a track record of steady growth and generate increasing positive free cash flow. Finally, it should enjoy sustainable tailwinds that can lift its revenue and profits over the long term.
Based on this list of characteristics, here are two promising growth stocks that you can buy and own for the next decade.
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1. Lululemon Athletica
Lululemon Athletica (LULU +0.95%) is a manufacturer and retailer of athleisure apparel and footwear. The company owned and operated 686 stores as of Oct. 29, and works closely with yoga practitioners and athletes across the world for research and development feedback on its products. Its fiscal years end on Jan. 31, and it has demonstrated strong top- and bottom-line growth in its past three fiscal years. Revenue nearly doubled from $4.4 billion in fiscal 2020 to $8.1 billion in fiscal 2022. Over the same period, net income expanded from $589 million to $855 million. The yoga apparel manufacturer also reported consistent positive free cash flow for all three fiscal years.
NASDAQ: LULU
Key Data Points
Lululemon's momentum has carried forward into fiscal 2023 (which ends Jan. 29, 2024), as evidenced by its recently released earnings report. Revenue for the first three quarters of fiscal 2023 (ended Oct. 29) was up 20.1% year over year to $6.4 billion while operating income improved by 20.2% to $1.2 billion. Net income rose 19.8% to $881 million. Free cash flow also came in at $467 million, reversing its free cash outflow of the prior year. The company also reported a total comparable-store sales increase of 13% in the third quarter and opened 14 net new stores.
There could be more growth to come for the athleisure player. In September, Lululemon inked a five-year partnership with fitness equipment and content provider Peloton as its exclusive partner for digital fitness content. In turn, Peloton will market Lululemon's athletic apparel in its stores. Management has also communicated a new five-year strategic plan called "Power of Three x2," one goal of which is to double its 2021 revenue to $12.5 billion by 2026. This plan is a follow-up to its original "Power of Three" plan unveiled in April 2019 to accelerate growth and double its digital revenue. The refreshed plan is anchored by the three strategic pillars of product innovation, customer experience, and market expansion that should fuel Lululemon's top- and bottom-line growth. Shares of Lululemon recently hit an all-time high above $500, but this may be just the beginning of a multiyear growth path that could fuel further gains for the stock.
2. Zscaler
Zscaler's (ZS +5.16%) in-line cloud security platform -- the world's largest -- protects thousands of customers from cyberattacks and data loss. The business enjoys a sustainable tailwind from the wave of corporation digitalization, which will drive up demand for cybersecurity services. Zscaler's financials demonstrate solid growth: Revenue rose from $673 million in its fiscal 2021 (which ended July 31, 2021) to $1.6 billion in its fiscal 2023. The cybersecurity firm's free-cash-flow generation has also steadily improved over the same period, going from $144 million in fiscal 2021 to $334 million in fiscal 2023.
NASDAQ: ZS
Key Data Points
The first quarter of fiscal 2024 saw Zscaler continue to flourish, with revenue jumping nearly 40% year over year to $497 million. What's more, free-cash-flow generation more than doubled year over year from $95.6 million to $225 million. The business also posted a sharp jump in operating margin to 18.1% for the quarter, up from 11.8% in the prior-year period. Free-cash-flow margin jumped significantly year over year, from 26.9% to 45.2%.
Meanwhile, Zscaler's ability to encrypt large quantities of data for larger enterprises at scale also helped it to gain more large customers. The number of customers providing it with more than $1 million of annual recurring revenue (ARR) jumped 34% year over year to 468, while those bringing it more than $100,000 of ARR increased by 22% year over year to 2,708. Based on its healthy momentum, Zscaler has upgraded its fiscal 2024 revenue guidance and now expects 29% to 30% growth, up slightly from its previous forecast range of 27% to 28%. Management believes that the total addressable market for cybersecurity solutions stands at around $72 billion, which provides Zscaler with ample opportunities to grow its revenue and free cash flow in the future.
