Over the last decade, S&P 500 value stocks as measured by S&P 500 Value Index have delivered a collective return of 179%. That’s certainly respectable. But growth stocks in the S&P 500 Growth Index have crushed that figure, generating a 427% return over the same time period. And that pattern of outperformance holds over the last five and twenty years, too.
Of course, every investor needs to consider their own risk tolerance when building a portfolio. Growth stocks tend be volatile. But if you can handle that volatility without losing your long-term mindset, it makes sense to invest at least some of your money in high-growth businesses. For instance, The Trade Desk (NASDAQ:TTD) and Zscaler (NASDAQ:ZS) are both well positioned to generate wealth for shareholders.
1. The Trade Desk
The Trade Desk specializes in programmatic digital advertising. Traditionally, media buyers have engaged in manual negotiations with publishers to purchase ad space, a time-consuming and costly way to determine prices. Programmatic advertising eliminates that inefficiency by automating the ad-buying process through real-time bidding. More importantly, because ads are not purchased ahead of time, programmatic tools allow ad buyers to build, measure, and optimize targeted campaigns in real time. That helps media buyers spend ad dollars more efficiently.
The Trade Desk designed its platform around bid factors, a technology that allows advertisers to set very expressive targeting parameters. With just a few clicks, clients can create billions of permutations that determine what they are willing to pay for particular ad impressions. That gives The Trade Desk an edge, because every other buy-side platform uses line items, a less precise (and more complicated) method of targeting ads.
That advantage has helped power a strong financial performance. In the third quarter, top-line growth accelerated to 39% year over year, as revenue reached $301 million. On the bottom line, The Trade Desk posted a GAAP profit of $0.12 per diluted share, up 50% from the prior year. And perhaps most importantly, the company retained over 95% of its customers, as it has for the last seven consecutive years. That stickiness bodes well for the future.
Looking ahead, The Trade Desk is well positioned to maintain that momentum. Programmatic ad spend will reach $155 billion in 2021, up 20% from the prior year. But that figure represents just 21% of total ad spend. As programmatic ad spend continues to take share, The Trade Desk should benefit from strong demand. That’s why this growth stock could produce monster returns for long-term investors.
Traditionally, businesses have protected their networks by building firewalls around the corporate perimeter, safeguarding all internal devices and data. But trends like cloud computing and remote work have made that approach ineffective, because many resources now exist outside the corporate perimeter. For that reason, businesses need a more modern solution to keep their networks secure. And Zscaler is that solution.
Specifically, its platform is designed as a secure access service edge (SASE), meaning it delivers networking and cybersecurity services from the cloud. It spans 150 global data centers, inspecting 190 million transactions per day. That tremendous scale translates into better performance and more effective security, while also eliminating the need for costly on-site hardware.
In short, Zscaler makes it possible for clients to quickly and securely connect to corporate resources (or the open internet) from any device or location. And the company has parlayed its first-mover status into a significant competitive advantage. In fact, research firm Gartner has recognized Zscaler as the industry leader for the last 10 consecutive years.
Not surprisingly, Zscaler’s business is growing quickly. In the fourth quarter of fiscal 2021 (ended July 31, 2021), revenue surged 57% to $197 million. And remaining performance obligation (contracted services not yet recognized as revenue) skyrocketed 98% to $1.5 billion, implying strong future sales growth. On a GAAP basis, Zscaler is still losing money, but quarterly free cash flow came in at $28 million, up 154%, demonstrating the sustainability of its business model.
Going forward, shareholders should expect that growth to continue. According to Gartner, at least 60% of organizations will have plans in place to adopt SASE services by 2025, up from 10% in 2020. As the clear leader, that trend should be a significant tailwind for Zscaler. That’s why this growth stock could generate monster returns for long-term investors.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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