Author: Daniel Sparks | October 10, 2018
Looking at growth for the long term
It takes quality, enduring companies to build a good investment portfolio. But where should investors begin their search? One idea is to start with underlying secular trends positioned to drive strong growth for businesses in a given niche or industry. Identifying these tailwinds could ultimately point investors to compelling companies with strong growth potential.
Of course, an approach like this has its drawbacks. Namely, stocks in hot and fast-growing segments tend to trade at pricey valuations. But for investors willing to hold stocks for five or more years, a premium valuation today for a stock in a fast-growing niche might be worth it.
Solar is a great example of a secular tailwind set to help drive sustained growth for industry incumbents. SolarPower Europe (via pv magazine) expects new photovoltaic (PV) installation capacity to rise at an average amount of 124 gigawatts per year between 2018 and 2022 -- up from an estimated 102.6 gigawatts of new installed capacity this year.
Consider SunPower's (NASDAQ: SPWR) momentum. Bookings hit a record high in the company's second quarter and shipments increased 37% sequentially. Meanwhile, Sunrun (NASDAQ: RUN) saw customers grow 29% year over year as it installed a record amount of solar energy and home batteries in the company's most recent quarter.
E-commerce's momentum is undeniable. Just look over at Amazon's (NASDAQ: AMZN) recent results and investors can easily see that this investing trend is still in its prime. The company's e-commerce sales, excluding digital sales and subscriptions, rose 14% year over year in the company's most recent quarter. And Amazon is milking e-commerce growth with other areas of its business too. For instance, Amazon saw its revenue from seller services increase 39% year over year and its revenue from subscriptions soar 57% year over year in the company's second-quarter. Both of these segments are benefitting from the rise of e-commerce.
There are multitudes of ways for businesses to profit from e-commerce growth. Other companies like Shopify (NASDAQ: SHOP) provide platforms and services to help businesses set up and maintain their e-commerce operations. Shopify's revenue soared 62% year over year in the company's most recent quarter.
Another investing trend worth keeping an eye on is fintech, or financial technology. Fintech stocks, which represent the digitization of the services industry, have proven to be some of the hottest investments recently. Shares of Square (NYSE: SQ), Intuit (NASDAQ: INTU), and PayPal (NASDAQ: PYPL) -- all fintech companies -- have risen about 240%, 60%, and 35% over the past twelve months, respectively.
Rapid adoption of digital payments, financial software, and online financial services for consumers and businesses has driven significant revenue growth for these companies. Their revenue rose 48%, 17%, and 23% year over year in their most recent quarters.
One investing trend worth looking into is the rise of connected TV. This secular tailwind is creating lots of business opportunities, from the obvious trends like the rise of streaming TV services from giants like Netflix (NASDAQ: NFLX) and Amazon Prime Video to rapid growth in the digital ads that play during online programming.
Two ways to highlight this trend include Netflix's rapid growth in members and the mind-boggling growth in connected TV ad spend on The Trade Desk's (NASDAQ: TTD) programmatic ad-buying platform. Netflix hit 130 million members in Q2 -- up significantly from 104 million in the year-ago quarter. Meanwhile, The Trade Desk saw ad spend for connected TV more than double sequentially in Q2.
Once a speculative technology, electric vehicles are now viewed as a necessary investment area for automakers. Nearly every major automaker now has plans to launch sizable electric car programs. It's no wonder automakers are racing to bring electric cars to market; International Energy Agency (IEA) estimates there will be 125 million electric vehicles on the road by 2030 -- up from just 3.1 million in 2017. Even if this forecast was off by 50 million vehicles, this would still represent a major transition for autos.
Tesla (NASDAQ: TSLA) couldn't have captured the wild momentum in electric vehicles any better in its recent third-quarter update on vehicle deliveries. During the period, Tesla's vehicle deliveries surged 219% year over year and 105% sequentially.
Last but certainly not least is cloud computing. The cloud computing market is expected to be worth $411 billion by 2020, up from about $180 billion today, according to research from CenturyLink and Statista.
Investors don't have to look far to see the extraordinary growth in cloud computing. Amazon Web Services -- Amazon's cloud computing business -- saw revenue and operating income jump 39% and 79% year over year in Q2, respectively. Microsoft's (NASDAQ: MSFT) Azure grew even more rapidly, with revenue for the cloud computing business increasing 89% year over year.
Big markets and rapid growth
The common denominator for all of these investing trends is that each of them not only includes major players with rapid growth, but also boast large addressable markets. This means businesses benefitting from these investment trends likely have significant room for further expansion, giving them good chances of not only living up to their valuations -- but possibly even turning into outperformers.
Of course, no stock is automatically a good investment just because it operates in a hot market. So, investors should consider this overview of investing trends as a way to screen for stock ideas rather than a menu of stock picks. In addition, investors should do their own due diligence on each company to see whether these stocks are compelling long-term investments or not.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. Daniel Sparks owns shares of Square, Tesla, and The Trade Desk. The Motley Fool owns shares of and recommends Amazon, Intuit, Netflix, PayPal Holdings, Shopify, Square, Tesla, and The Trade Desk. The Motley Fool has the following options: short January 2019 $80 calls on Square. The Motley Fool has a disclosure policy.