(Ryan Downie)
Long-term returns are determined by a few key characteristics, and investors should focus on them. Stocks with unique potential tend to have exceptional growth catalysts and broad economic moats. These three stocks all have clear opportunities for rapid growth as well as sustainable competitive advantages that create serious long-term upside potential.
1. Veeva Systems
Veeva systems (NYSE: VEEV) is the leading provider of cloud software for the life sciences industry. The list of more than 1,200 customers includes pharmaceutical companies, biotechs, research organizations and device manufacturers. Ranging from early-stage drug candidates to the largest companies in the world, nearly all of the top 20 pharmaceutical companies are Veeva customers.
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Veeva’s suite of products is critical to different stages of the business lifecycle in the target industries. Customers rely on the software for data collection, management, reporting, analysis, and regulatory compliance during development and clinical trials. Veeva is also a major provider of sales and marketing capabilities with customer relationship management software and data analytics tools.
The company has a wide economic moat, which is key to its long-term investment strategy. Its dominance in the life sciences niche protects it from competition from broader players such as e.g salesforce.com or smaller disruptors with the same industry focus. Veeva has clear evidence that its customers are finding value in its services and growing their relationship with the company. The retention rate of subscription revenue is 119% and the average number of products per customer has increased from 1.71 to 2.71 over the last five years.
Additionally, Veeva has every opportunity to outperform the market in growth. Sales increased by 26% in the last fiscal year. The life sciences industry is outpacing global economic growth, which should result in more opportunities for Veeva. The company can build on this by introducing new products for existing customers. There is also the long-term prospect of expanding into neighboring markets, although this would come with a new set of challenges and costs.
It’s not a cheap stock, with a forward price-to-earnings (P/E) ratio of about 50, but that’s not expensive enough to stop growth investors who are in it for the long term.
2. ServiceNow
service now (NYSE: NOW) provides cloud-based software that automates workflows and other business processes. Its customers can unleash employee productivity and achieve greater efficiency across their entire organization. That’s an obvious value proposition, and ServiceNow has a particularly strong presence in IT operations — it’s a great space to occupy as the digital transformation trend continues to dominate the business world.
The company has nearly 1,400 customers with annual contracts worth over $1 million — which bodes well for long-term stability. The company boasts a net retention rate of around 125%, proving its ability to retain its customers and build on those relationships with additional services such as human resources, customer service, and other administrative functions. High switching costs and close relationships are important elements of an economic moat and a shield against competition.
ServiceNow has publicly announced its goal to surpass $15 billion in annual revenue by 2026, which requires compound annual growth of 20%. It certainly seems possible for the company, which topped its own guidance with growth of 29% last quarter. It also reported nearly 30% growth in “current outstanding performance obligations,” which is a strong predictor of near-term revenue growth.
The stock is expensive at 76 times earnings and nearly 20 times sales.
It’s no surprise that investors have to pay a premium for this upside potential, but make sure you’re prepared for the risk and volatility inherent in stocks with premium valuations.
3. Hardware store
home depot (NYSE:HD) leads the home improvement retail market. The long-term upside potential here is a bit different than the growth stocks above.
Housing has strong long-term catalysts in the US Since the housing market collapse nearly 15 years ago, more than five million more homes have been started than new homes have been built.
This problem has been further complicated by mass resettlement and urban exodus during the pandemic. It is a particularly acute problem for low-income people and families displaced from their hometowns.
Rising interest rates, input price inflation and general economic uncertainty are creating some negativity towards homebuilder stocks right now, but these are all temporary issues. This is nothing new for this cyclical industry. Ultimately, the massive housing deficit should be a long-term catalyst for both builders and their suppliers for at least a decade. Home Depot is generally benefiting from construction and relocation — that impact should be even greater after the company reacquired construction company HD Supply in November 2020.
This is an opportunity for value investors to jitter where others jitter. Home Depot could be in for a tough couple of quarters, and the stock is suffering as a result. However, the company will not go out of business. You can enjoy a 2.4% dividend yield while you wait for long-term cash flows to push Home Depot’s market cap higher.
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Ryan Downie owns Salesforce.com and Veeva Systems. The Motley Fool owns shares of and recommends Home Depot, Salesforce.com, ServiceNow, Inc., and Veeva Systems. The Motley Fool has a disclosure policy.