Growth stocks can help you grow a small sum of money into a large nest egg for retirement. While stock selection plays a crucial role in your returns, many of the best growth stocks are brands and services you might use every day.
If you have extra cash to put in a few stocks for at least five years, here are two top growth stocks that have delivered exceptional returns to their shareholders and still offer long-term upside.
Image source: Getty Images.
1. Netflix
Netflix (NFLX 5.30%) has been a rewarding investment for investors, compounding returns for many years. A $1,000 investment 10 years ago would be worth $8,600 today. It has a massive advantage in data that helps it release shows that members want to watch. This content-quality booster has made Netflix one of the most profitable entertainment companies, and there are still significant opportunities for more growth.
Netflix has over 300 million members, yet the service only captures about 7% of global entertainment spending and about 10% of TV viewing time. It can increase its share by leveraging its massive content spending. Netflix spent $17 billion on content production last year, all of which was funded out of its operating cash flow. This cash cushion is a significant advantage over other entertainment companies that may not be as profitable, and therefore can't offer the variety of content that Netflix can.
NASDAQ: NFLX
Key Data Points
Netflix is not prioritizing growth in members, but instead maximizing long-term revenue, as higher revenue allows for a larger content budget. Revenue has been growing consistently at double-digit rates over the last year. The company is focusing on advertising to create new revenue channels and expand its appeal to new members with more affordable ad-supported plans. This low-cost subscription plan has been a successful strategy so far, with ad revenue expected to double in fiscal year 2025.
More revenue flowing in from advertising and new member signups should continue to fuel Netflix's profits. It already earns a high operating margin of 29% on a trailing-12-month basis, but analysts expect margins to continue climbing, consistent with management's long-term goal.
Analysts are projecting free cash flow to soar from an expected $9 billion in 2025 to over $20 billion by 2029. That's a 22% annualized growth rate, which should yield outstanding gains for investors who buy the stock today.
2. Shopify
Shopify (SHOP +1.19%) turned a $1,000 investment into $59,000 over the last 10 years. It has become the default option for merchants who need to set up an online store.
Shopify is building on its lead by integrating artificial intelligence (AI) tools into its arsenal to make running an online business easier than ever before. This combo positions it well to further capitalize on a growing $6 trillion global e-commerce market, according to eMarketer.
NASDAQ: SHOP
Key Data Points
Shopify is the leader in online commerce solutions, but it's not slowing down. It is experiencing strong growth, penetrating new markets such as in-store payments and business-to-business solutions, which is expanding the addressable market. Revenue accelerated to a 32% year-over-year growth rate in the last quarter, indicating a monster opportunity still ahead for the company.
Strong revenue growth is a hallmark of an excellent growth stock, but the real reason to be excited as an investor is the company's growing free cash flow. Shopify has focused on driving more balanced top- and bottom-line growth over the past few years. This strategy is paying off, with free cash flow surging 20% year-over-year in the last quarter, reaching $1.9 billion on a trailing 12-month basis. The financial success provides even more capital to invest in cutting-edge AI tools like Catalog AI, which automates the process of creating product listings and other tasks.
Analysts are projecting Shopify's free cash flow to grow at a 28% annualized rate through 2029. This increase would result in free cash flow of $5.5 billion in the next four years. This profitable growth will make Shopify a significantly more valuable business over time, which is why it's one of the best growth stocks to consider for parking some extra cash.
