the Standard & Poor’s 500 The index has returned about 10% annually since 1957. This closely matches the growth in average company earnings. ProfitsIf you want to beat the market, you need to look for companies that can grow their earnings well above average.
There are two companies that can deliver superior earnings growth and outperform the S&P 500 over the next five years.
1. Tesla
Tesla (NASDAQ:TSLA) The stock has returned 8,500% to shareholders over the past 12 years, but the stock hasn’t hit new highs since 2021. However, the stock has followed this pattern before. The stock previously posted modest gains between 2014 and 2018 before surging tenfold to its previous high of $414. Here’s why another bull run is imminent.
Despite the high interest rates and Increasing competition in the electric car marketTesla posted strong second-quarter results, with automotive revenue up 14% from the first quarter. Tesla remains one of the world’s most profitable automakers, generating $8.1 billion in adjusted net income over the past four quarters on $95 billion in revenue.
Tesla will emerge from this recession in a stronger competitive position thanks to its efforts to lower costs per vehicle. The opportunity for electric vehicles remains enormous, with annual unit sales expected to more than double over the next four years, according to Statista. By cutting costs, Tesla will remain a formidable leader that can profitably sell more affordable electric vehicles to capture significant market share.
CEO Elon Musk has previously said he believes Tesla could one day be worth $1 trillion in revenue. That’s a long shot, but it shows that management is increasingly investing in initiatives that will boost the company’s margins and drive strong earnings growth over time. Some of those opportunities are expected to come within the next five years, such as increased subscriptions to Tesla’s self-driving software, energy solutions, and a robotaxi service.
Analysts expect Tesla’s profits to nearly double next year, which could be the start of a new trend. As auto revenues return to growth and Tesla continues to improve its profit margins, the company could post high-double-digit earnings growth to support market-beating returns.
2. Spotify Technology
Spotify Technology (NYSE: SPOT) The company’s shares have risen 128% over the past 12 months, driven by increased demand for premium subscription plans. The company is cashing in on its profits by releasing more content and raising prices, actions that could result in above-market returns for shareholders.
There aren’t many services that are posting double-digit revenue growth in this challenging retail environment. But it’s clear that music and podcast listeners value their monthly Spotify subscriptions very much. Spotify’s total monthly active users grew 14% year-over-year in the second quarter to 626 million.
Spotify is dominating the audio market by expanding into audiobooks and podcasts. It reported 12% year-over-year growth in premium subscribers in the last quarter, which is helping to generate more revenue. More importantly, the company’s content strategy is boosting user retention and leading to better profitability for the platform.
Spotify has recently implemented price increases in certain markets, but the higher rates have led to lower subscriber churn than previous price increases. This means that higher rates are beneficial to the bottom line. The company’s operating profit margin was 7% in the second quarter, completely reversing the operating loss in the year-ago quarter, and is expected to continue to rise over the long term.
Analysts expect the company’s adjusted earnings to reach $10.41 per share in 2026 — a huge improvement over negative earnings in the past. And with Spotify’s operating margin still relatively low for a subscription service, there could be plenty of room for further margin improvement and strong earnings growth that would support market-beating returns.
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John Ballard He holds positions in Tesla. The Motley Fool holds positions in and recommends Spotify Technology and Tesla. The Motley Fool holds positions in and recommends Spotify Technology and Tesla. Disclosure Policy.
2 Unstoppable Stocks That Could Crush The S&P 500 Over The Next 5 Years Originally posted by The Motley Fool
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