Few things excite Wall Street as much as a company that's posting industry-trouncing sales growth. That's because such businesses are winning market share, which implies that they've got what it takes to beat back the competition. And while growth stocks tend to produce limited earnings -- and sometimes significant losses -- during their early expansion phases, that period is often just a prelude to a longer streak of robust profits.
With that promise in mind, let's take a closer look at the largest-market-cap growth stocks and how they achieved their premium positions over their peers.
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The 10 biggest growth stocks of the last five years
Growth is easier to achieve when you're working from a small sales base. It's much harder to boost sales by 10% from $25 billion than from $2 billion, after all.
That's why it's particularly impressive to find a company that's expanding quickly even after achieving a sizeable footprint. Specifically, each of these 10 companies is valued at a market capitalization of at least $20 billion and has boosted its sales at a compound annual growth rate of at least 20% over the last five years.
Annualized 5-Year Revenue Growth (Through 2018)
Amazon (NASDAQ: AMZN)
Facebook (NASDAQ: FB)
Netflix (NASDAQ: NFLX)
Salesforce.com (NYSE: CRM)
NVIDIA (NASDAQ: NVDA)
Charter Communications (NASDAQ: CHTR)
Intercontinental Exchange (NYSE: ICE)
Micron Technology (NASDAQ: MU)
Vertex Pharmaceuticals (NASDAQ: VRTX)
Johnson Controls International (NYSE: JCI)
If Amazon.com were simply the planet's largest e-commerce retailer, that would likely be enough to justify a large premium for the stock. And there's no debating that point: Amazon routinely handles more than one-third of all digital sales in the U.S. Given that e-commerce shot up to more than 10% of the broader retailing pie in the 10 years ending in 2019, it's no surprise that the industry leader saw its annual sales soar by almost 900% in that period.
Amazon's huge base of Prime subscribers, its world-class shipping and fulfillment network, and its ability to offer low prices are just a few of the competitive moats protecting its e-commerce dominance from both online specialists and physical retailers with omnichannel ambitions, such as Walmart (NYSE: WMT).
But the company has also used that platform's revenues to support its moves into more profitable, faster-growing niches such as producing its own consumer electronics or delivering cloud services.
Considering the bright long-term potential for each of these business lines, it's likely that Amazon will face increasingly determined competition in each of them. But it's also a good bet that the next few decades will bring positive returns for its shareholders while the company capitalizes on the shift toward e-commerce while branching out from its retail roots.
As most investors will remember, Facebook had a rocky start on Wall Street: Its shares sank sharply immediately following its 2012 public offering. But the social media giant has gone on to justify the pre-IPO hype -- and then some. It booked $56 billion in sales in 2018, up from $12.5 billion just four years earlier. Its profits have risen at an even faster pace, mainly thanks to improvements to the service that have benefited both users and advertisers.
The key ingredient to all that success has been phenomenal user engagement. With more than 2 billion people logging in at least once a month and in excess of 1.5 billion people checking their feeds daily, Facebook is truly the 800-pound gorilla in the social media space. It continually finds ways to make its service more attractive for users -- and for advertisers, too, including by adding engaging video ads in recent years.
All of that streaming requires a world-class data infrastructure, which helps explain why Facebook has ramped up capital expenditures at a faster pace than revenue growth. CEO Mark Zuckerberg and his team are also investing aggressively in building on their early leads in artificial intelligence and virtual reality. This spending will necessarily cut into its near-term profitability, especially given that some of its bets will inevitably fail to pay off. But whatever its next growth phase looks like, it's clear that Facebook's early detractors who claimed it could never find a way to profit from its user engagement were mistaken.
Netflix began as a scrappy DVD-rental-by-mail service but successfully pivoted into internet-delivered entertainment around 2012. Its timing couldn't have been better. Thanks to its early-mover advantage in a booming industry, its tech innovations, and its vast and growing catalog of original content, the streaming service's global membership growth accelerated every year from 2013 through 2018. By the end of that period, it claimed about 150 million subscribers around the world.
CEO Reed Hastings and his team have demonstrated a knack for balancing subscriber growth with improving profitability, and the company's continued success will depend on those leaders' ability to keep raising the value of the service -- and boosting monthly prices at the same time. That will become harder as more competition enters the streaming video space -- and media giants such as Disney and Comcast aren't the only players launching new streaming services of their own.
Moreover, Netflix is moving closer to saturation in the U.S. market, which makes subscriber growth domestically harder to come by. Yet with tens of millions of people around the world likely to make the switch away from broadcast TV over the next few decades, and with Netflix still accounting for just a tiny fraction of all video viewing, it continues to have an inside track on market-thumping revenue gains.
Tech companies often possess a number of qualities that land them naturally in the category of growth stocks, and Salesforce illustrates them beautifully.
Since its founding in 1999, the company has been developing customer relationship management software, which performs a host of basic-necessity services that most other enterprises need in order to conduct business. Delivering its product via the cloud means it never faces the manufacturing and shipping challenges that can limit companies in other industries. And that helps it support head-turning profitability, with gross profit margins often passing 80% of sales.
Salesforce has capitalized on the rising popularity of cloud-based services over the prior delivery model of software purchases or limited-time licenses. Its shift to that subscription model has powered robust sales gains, as well as improved profitability and steadier cash flow. Yet its market-thumping expansion pace has only accelerated in recent years, which indicates that its customers are finding many reasons to renew their subscriptions and even widen their contracts to cover more services.
All of that success has attracted competition from major cloud software providers, many of which are willing to cut their prices and margins in a bid to carve out some market share. Thus, investors who buy Salesforce stock today have to hope that the bright future ahead in the cloud software-as-a-service industry niche spells good news for its business, even as rivalries intensify.
NVIDIA began its corporate life focusing on producing graphics processing units for PCs. However, as with most companies on this list, that early platform only set the stage for the real growth engines that appeared later.
Image source: Getty Images.
Its impressive sales gains in recent years have been supported by that graphics technology, which is still used by PC and gaming device manufacturers to enable cutting-edge visual experiences. Yet NVIDIA has derived even faster growth from new business segments such as artificial intelligence, virtual reality, and high-performance computing. Businesses in emerging industries such as cryptocurrencies and autonomous driving have found the company's chips ideally suited to their needs.
That success hasn't come cheap. In fact, NVIDIA has poured tens of billions of dollars into research and development since its founding in 1993. Its sales are susceptible to significant downswings, too, as investors learned during 2018's crash in the value of cryptocurrencies, which sapped demand from miners for the company's hardware. However, if it can maintain its development lead as demand for high-tech processing hardware rises, NVIDIA has a shot at continuing to expand its sales base while increasing its pricing power.
6. Charter Communications
Charter Communications' growth in recent years has come almost entirely from a serious acquisition spree. The cable giant purchased both Time Warner Cable and Bright House Networks in 2016 and then spent the next several years integrating these massive businesses into its operations. As a result, Charter now possesses one of the largest footprints in the country for high-speed-internet, video, and voice services.
Like its peers, Charter has seen its TV subscribership numbers decline as consumers unfetter themselves from expensive cable packages in favor of skinny bundles and on-demand services like Netflix. Yet its overall revenues have continued to rise thanks to a combination of increased internet delivery services and rising monthly subscription fees. Both of these trends are supported by that stampede toward internet-delivered entertainment.
Still, given its large size and the unlikelihood of game-changing acquisitions ahead, analysts are looking for Charter Communications to deliver growth closer to the 5% uptick it posted in 2018 rather than the 43% surge of 2016. Cable companies must also make aggressive capital investments into maintaining and upgrading their delivery infrastructure, and those outlays eat into their returns. On the plus side, the cable giant is in a good position to generate robust earnings as long as it keeps raising the bar on TV and internet service delivery.
7. Intercontinental Exchange
Intercontinental Exchange operates a wide range of listing houses, marketplaces, and exchanges for assets such as stocks, commodities, and bonds. It earns commissions and fees from the trading of these instruments, which means its profits are supported by the combination of rising trading volumes and higher contract prices.
Its growth lately has come from a mix of major acquisitions, such as its 2013 purchase of NYSE Euronext, and its expansion into offering additional types of financial instruments and services. For example, ICE launched its data services center in 2016. Demand for those products helped it achieve double-digit-percentage sales gains in 2018.
Because many of its businesses support traders who are seeking to offset market volatility, ICE's earnings prospects would be hurt by a long period of relative calm in key industries such as energy. However, trends have generally moved toward increasing price swings in these parts of the market, among others. Given that fact, ICE can look forward to robust growth as one of the biggest names in trading and financial risk management.
8. Micron Technology
Micron Technology develops and manufactures data-storage products, including the solid-state and flash drives that have always been found in PCs, smartphones, and graphics cards and are just now entering other products including automobiles, TVs, and camera drones. Some of the chief factors that support its sales include the proliferation of electronics and the increasing demand for cutting-edge performance on metrics like power consumption, speed, and reliability. As one of the biggest storage drive manufacturers and a leading innovator in the space, Micron is ideally positioned to offer competitive prices while still nudging profitability higher by pushing the industry forward.
Micron has outpaced peers like Intel (NASDAQ: INTC) in recent years by better delivering in-demand technologies. That success combined with surging selling prices to push sales higher by a whopping 64% in 2017 and an additional 50% in 2018.
The company can just as easily be stung by falling prices, though, since these are set by supply-and-demand dynamics in the wider industry. That fact makes Micron a riskier stock than others on this list.
9. Vertex Pharmaceuticals
Vertex Pharmaceuticals is the leading biotech providing treatments for cystic fibrosis, a disease that impacts the lungs and digestive system. Its medicines are taken by approximately half of all CF patients, in fact. That market position, combined with Vertex's strong track record of treatment advances, has delivered incredible growth for shareholders, with annual sales rocketing above $3 billion in 2018 from below $500 million five years earlier.
Biotech stocks come with many additional risks that don't apply to businesses in other niches. The biggest of these is that the company's drug pipeline may fail to deliver -- often, apparently promising treatment candidates don't measure up and therefore fail to receive regulatory approval.
So far, though, Vertex's cystic fibrosis treatments haven't disappointed in this way, and a continued run of favorable clinical trial results would lay the groundwork for a broader application of its intellectual property to patients around the world. Yet those sorts of outcomes are far from a sure bet anywhere in the pharmaceutical industry. A large-scale study reported on early in 2018 concluded that, since 2000, fewer than 14% of treatment candidates had made it from phase 1 trials to regulatory approval -- and that was a better success rate than expected based on prior studies.
10. Johnson Controls International
Johnson Controls International earned a spot on this list in much the same way as Charter Communications did: through an aggressive merger. The company, which began its life in the late 1800s as an installer of heating and cooling systems, joined with building services leader Tyco in 2016 to become a global giant in fields such as fire, security, HVAC, and power solutions across industrial and residential real estate. Combining these companies pushed sales above $31 billion in 2018, or almost double Johnson Controls' result from four years earlier.
Analysts don't expect anything approaching that level of growth going forward. Johnson Controls should expand revenue at close to the industry's average growth rate, which in 2018 was just 4%.
Beyond sluggish gains, investors have also seen only modest improvements in key financial metrics such as operating margin and return on invested capital in the first few years following its merger. These factors suggest Johnson Controls may settle back to look more like a value stock than its high-growth peers mentioned above.
Part of a balanced portfolio
Growth stocks attract investors who tilt toward the aggressive end of the risk spectrum. Quick revenue gains can easily reverse themselves, for example. That risk is amplified by the fact that these stocks are usually available only at a premium valuation, which opens the door for sharp price declines during operating stumbles.
For those reasons, growth stock investing requires the application of good foundational investing principles such as diversification and a typical holding period that's measured in years, not weeks. Even so, buying companies like those listed above will test your patience as an investor through the inevitable seasons of sharp declines.
Knowing these risks before becoming a growth stock investor is an important first step toward earning healthy long-term returns. This is true whether you make that approach a core part of your portfolio or use it to simply balance against more conservative investments like value stocks or bonds.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Demitrios Kalogeropoulos owns shares of Amazon, Facebook, and Netflix. The Motley Fool owns shares of and recommends Amazon, Facebook, Intercontinental Exchange, Netflix, NVIDIA, and Salesforce.com. The Motley Fool owns shares of Intel and has the following options: short September 2019 $50 calls on Intel and long January 2021 $100 calls on Salesforce.com. The Motley Fool recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.
This article was originally published on Fool.com