Growth stocks are soaring in the bull market, but new data about inflation put the brakes on the market's rise last week. Will inflation keep moving up? Will the Federal Reserve cut interest rates? Is a recession still a possibility?
These kinds of questions keep economists on their toes, but smart investors zoom out and focus on the long term. Ten years from now, whether or not there was a recession in 2024 will be largely irrelevant. The economy should keep growing, even if it's not linear growth, and the stock market should be well ahead of where it is today.
That's why it's important to find stocks that have long-term potential, and growth investors should look for great growth stocks that could maximize their investment over 10 years and longer.
On Holding (ONON -0.55%) is up 19% year to date, about double the S&P 500's performance. It could keep climbing this year, but the long-term outlook is what's really exciting about this stock, and it could 10x over the next 10 years. Here's why.
How On Holding is challenging industry leaders
On makes premium athletic footwear and apparel. Its CloudTec running shoes and sports shoes have developed a massive following of devoted fans, and they're the footwear of choice for a growing group of affluent shoppers.
The Swiss-based company was founded with the idea of developing technologically advanced shoes that provide extreme comfort and enhance performance for athletes. These shoes have a unique sole that's meant to be like walking like on a cloud and makes them very noticeable.
On has many top athlete endorsements and sponsors tennis champions Iga Swiatek and Ben Shelton, as well as New York City Marathon winner Hellen Obiri. Swiss tennis great Roger Federer is a huge fan as well as an investor in the company.
On isn't just for athletes, though, and its products have developed a cult-like following among the upscale shoppers who can afford its premium prices. Its designs are truly different than the standard-bearers of athletic footwear, and On is challenging the biggest names in the industry like Nike, Lululemon Athletica, and Adidas.
Its products are also more expensive than all of them, even premium brand Lululemon, and its core customers can afford to pay for them -- inflation or not. That's why it's been reporting powerful results despite the grim economic environment.
Sales increased 47% year over year in 2023, or 55% currency neutral. That's an important distinction to point out, because currency fluctuations are impacting its results negatively, but that doesn't give an accurate picture of operations.
Profitability is also improving. On has industry-leading gross margins, which increased from 56% in 2022 to 59.6% in 2023, due to its high prices and high rate of full-price sales. Net income increased 38% year over year for the full year, although it posted a net loss in the fourth quarter.
How On can 10x over 10 years
On is still in its infancy, and it's growing its brand presence globally. It has robust direct-to-consumer channels as well as a strong wholesale business, and it's getting the word out.
Let's go through the numbers and see if On can really 10x in 10 years. Management gave prior guidance of achieving a compound annual growth rate (CAGR) of 26% through 2026, and it's already on track to beat that with updated guidance of a 30% sales increase in 2024. Using the 2023 numbers with a CAGR of 26% over 10 years, sales would reach about $20 billion in 10 years. Keeping the price-to-sales ratio of 6.3 constant, that would indicate a market cap of $126 million, or just about 10x today's market cap of $10.23 billion.
Over 10 years, the annual growth rate could decelerate. But if the economy perks up, it could also accelerate, so it's not unreasonable to keep this CAGR. The price-to-sales ratio is likely to come down, though. Using a CAGR of 20%, annual sales in 10 years would be $12.4 billion, and using the same price-to-sales ratio, market cap would be $78 billion, or about 7.5 times today's market cap.
When On becomes reliably profitable, the stock is more likely to follow earnings rather than sales, and the price-to-earnings ratio would be a better indication of how the price could move.
Although it's a possibility that On stock could reach $100 billion in market cap in 10 years, it does look like a stretch right now. But it doesn't look like a stretch to imagine that in 10 years, it should be much bigger. If investors can focus on that and have a long-term horizon, On could be an excellent stock to consider right now.
