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Stock prices tend to follow company earnings over time, so businesses that grow their profits faster than the market average have a real shot at delivering market-beating gains for their shareholders.
Axon Enterprise (NASDAQ:AXON), Toast (NYSE:TOST), and Spotify (NYSE:SPOT) fit that profile. Analysts expect all three to grow their earnings faster than the S&P 500 (SNPINDEX:^GSPC), which has historically grown earnings at an annualized rate of about 11%. Here's why these superior growth stocks are worth buying for the next 10 years.
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Axon shares have fallen about 44% year to date through Nov. 6 as delays in the federal government's deployments of its drones cut into its revenue outlook in its latest report. But the public-safety equipment and software provider's software segment growth accelerated to 43% year over year in Q3. The sell-off gives investors an opportunity to get in on that growth at a lower price.
Axon's software platforms help law enforcement agencies manage evidence, records, and emergency responses. Its newer software offerings reached nearly $500 million in annualized revenue, more than doubling from a year earlier. These products are becoming significant contributors to the company's growth, with revenue of $437 million last quarter, compared to the company's total of $909 million.
Customer demand looks strong. Future contracted bookings grew 39% year over year to $15.8 billion, with 20% to 25% of that total expected to be fulfilled in the next year. That greater visibility into future revenue can help the stock support a premium valuation.
Management is targeting $6 billion in annual revenue by 2028, against an estimated $159 billion market. The scale of its opportunity can support a decade of strong growth. Analysts expect about 27% annual earnings growth over the next several years. The opportunity justifies paying roughly a forward earnings multiple of 43 for the stock.
Toast shares are down about 2% year to date through Nov. 6. But this restaurant-technology provider is building a much bigger business: Management says its expansion into larger chains, international markets, and retail is on track, and revenue from those markets is set to double for the second straight year.
Together, those newer markets are scaling toward a $200 million annualized recurring run rate, a measure of subscription and adjusted payment fees. Toast's single platform helps its clients modernize operations, and its growing reach is showing up in the numbers. In Q3, the total number of locations it serves rose 21% year over year to 189,000.
Importantly, profits are improving with growth. Third-quarter gross profit from subscription services and financial technology solutions rose 29% to $630 million, and Toast generated $181 million in free cash flow. That cash gives it resources to keep expanding its business.
Toast's business is vulnerable to broader consumer spending patterns, with weaker diner spending potentially slowing the growth of the payments its systems process. Still, management sees larger opportunities in its newer markets than in its core business. Analysts project about 23% annual earnings growth. With the stock trading at roughly 24 times forward earnings based on the Nov. 6 close, Toast offers market-beating return prospects for long-term investors.
Spotify shares have more than doubled over the last five years, but they're down about 3% year to date through Nov. 6. The audio-streaming service has already rewarded patient owners, and its latest quarterly results show a business still growing its audience and generating cash.
Spotify is giving listeners more reasons to stay. The company plans to expand its audiobook presence from 22 markets to more than 180 by year's end, and management says its audiobook listeners use Spotify on more days than other users. These additions to its catalog of audio offerings deepen the appeal of a service that reached 788 million monthly users last quarter, up 11% year over year.
Spotify is turning that reach into profits that can be reinvested in more features and services. Third-quarter operating income grew faster than revenue, up 15% year over year, and trailing-year free cash flow totaled about $3.7 billion on nearly $22 billion of revenue. Those profits give Spotify the resources to improve its service and reach more users, with management targeting 1 billion users.
Investments to support expansion can pressure near-term margins and earnings. But management is aiming for mid-teens annualized revenue growth through 2030. Trading now at roughly 44 times forward earnings, with estimates implying 26% annualized earnings growth, Spotify could deliver market-beating returns.
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John Ballard has positions in Axon Enterprise. The Motley Fool has positions in and recommends Axon Enterprise, Spotify Technology, and Toast. The Motley Fool recommends the following options: long January 2028 $15 calls on Toast. The Motley Fool has a disclosure policy.
3 Superior Growth Stocks That Can Outperform for the Next 10 Years was originally published by The Motley Fool
