The average stock market return over the past few decades (without accounting for inflation) is around 10%. That makes broader equities highly competitive compared to other asset classes, especially since investors can do better than standard returns. The key is to invest in companies with market-beating potential. Even though past success is no guarantee of the future, it is often helpful to start by looking at companies with a history of performing better than the market.
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Two examples are Intuitive Surgical (ISRG -0.32%) and Veeva Systems (VEEV 0.87%). These companies have produced the kinds of returns in the past decade that turned an initial investment of $1,000 into well over $8,000. Here is why they can still beat the market.
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1. Intuitive Surgical
Over the past 10 years, Intuitive Surgical, a medical device specialist, has produced a compound annual growth rate of 26.1%. That's good enough to turn $1,000 into $10,140. In contrast, a $1,000 investment in the S&P 500 would turn to just $3,320 over the same period at an annual return rate of about 12.8%.
How did Intuitive Surgical pull it off? The company is the undisputed leader in the robotic-assisted surgery (RAS) market thanks to its da Vinci system, though it markets another device called the Ion.
The da Vinci system is its main growth driver, and is approved for various procedures, including bariatric, urologic, cardiac, gynecologic, and general surgeries, among many others. Intuitive Surgical has had little competition for its crown jewel. With the growing adoption of RAS, the company's revenue and earnings have rapidly increased over the past 10 years.
The competitive landscape is changing. Medtronic, another medical device specialist, is close to earning clearance in the U.S. for its Hugo system in urologic procedures. Johnson & Johnson, another healthcare leader, could eventually enter this market too with its Ottava system. Despite mounting competition, Intuitive Surgical could still deliver market-beating returns, though perhaps not as impressively as it has since 2015.
It has a tremendous first-mover advantage in the RAS market, with an installed da Vinci base of 10,189 as of the end of the first quarter, an increase of 15% year over year.
Since these devices are expensive, healthcare facilities want to stick with whichever one they chose first. If it breaks, Intuitive Surgical offers repair services. And if they break irreparably and must be replaced, it's easier to get the same model since hospital staff have already spent considerable time training on it. In other words, Intuitive Surgical benefits from high switching costs for its customers.
Meanwhile, an increasingly aging population worldwide should lead to even greater volumes in surgical procedures undertaken, and that ultimately benefits Intuitive Surgical. The company's first mover advantage, competitive moat, and significant growth avenues make its prospects attractive. It's not too late to get in on this company, despite it crushing the market over the past decade -- it can do the same through 2035.
2. Veeva Systems
Veeva Systems offers cloud-based services to life science companies. It has found tremendous success in the past 10 years, a period during which the stock rose at a CAGR of 24.2%, good enough to turn $1,000 into $8,734. The cloud industry is ruthlessly competitive and is dominated by companies far larger than Veeva Systems, but it has found success by focusing almost exclusively on the healthcare industry.
The companies it caters to in the healthcare space have specific demands and needs, and operate in a highly regulated environment. They often spend significant amounts in upfront investments and undertake years of research and data collection before launching a product to market. Because of these constraints, many generic cloud services won't work with them. Enter Veeva Systems. The company's success in this niche explains its performance since 2015. It has generated excellent financial results, even with a slowdown in the cloud market about three years ago due to an economic downturn.
That could happen again if many investors' fears come true and we find ourselves in a recession. However, Veeva Systems' prospects for the next decade still look strong. Recessions don't last forever, and the projections point to the cloud market's continued growth.
It is worth noting that Veeva Systems also benefits from high switching costs. Its clients depend on its services for day-to-day operations, be it to collect and store data, for regulatory compliance, and more. They wouldn't want to switch providers and risk disrupting daily operations. Veeva Systems' switching costs are another reason it has been able to compete in a sea of larger companies, and it still has plenty of room to run within its addressable market.
It estimates a $20 billion opportunity, of which it has captured about 14%. Further, the company's TAM should continue growing along with the life sciences industry, like it has in the past. Veeva Systems should continue beating the market over the next decade as it makes more headway into its still under-penetrated niche of the massive cloud industry.
