2 Unstoppable Growth Stocks That Could Destroy the S&P 500 in the Next 5 Years

This S&P500 The index has delivered annual returns of around 10% since 1957. That roughly matches the growth in average company earnings. If you want to beat the market, you need to look for companies that can grow their earnings well above average.

Here are two stocks that could deliver above-average 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 has failed to reach new highs as of 2021. However, the stock has followed this pattern before. The stock previously delivered modest gains between 2014 and 2018 before soaring tenfold to its previous peak of $414. Here’s why another bull run is coming.

Despite higher interest rates and growing competition in the electric vehicle (EV) market, Tesla delivered a strong second-quarter update, 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 revenue of $95 billion.

Tesla will emerge from this crisis with a stronger competitive position thanks to its efforts to lower its cost per vehicle. The EV opportunity remains huge, with annual unit sales expected to more than double over the next four years, according to Statista. By lowering costs, Tesla will remain a formidable leader that can profitably sell more affordable EVs to gain significant market share.

CEO Elon Musk has previously said he believes Tesla could one day make $1 trillion in profit. That’s a very long-term goal, but it shows management is increasingly investing in initiatives that will boost the company’s margins and, over time, lead to strong profit growth. Several of those opportunities should come to fruition in the next five years, such as growing subscriptions for Tesla’s self-driving software, energy solutions, and robotaxi service.

Analysts expect Tesla’s profits to nearly double next year, which could be the start of a trend. As automotive revenue returns to growth and Tesla continues to improve its profit margin, the company could see double-digit earnings growth to support market-beating profits.

2. Spotify Technology

Spotify Technology (NYSE:SPOT) shares are up 128% in the past 12 months, fueled by growing demand for its premium subscription plans. The company is boosting its profits by releasing more content and raising prices, and those moves could deliver higher, outperforming returns for shareholders.

Few services are seeing double-digit revenue growth in this challenging retail environment. But music and podcast listeners clearly value Spotify’s monthly subscription. Spotify’s total active users grew 14% year-over-year in Q2, reaching 626 million.

Spotify dominates the audio market, expanding into audiobooks and podcasts. In the latest quarter, it saw a 12% year-over-year increase in premium subscribers, which is helping to drive higher revenue. Most importantly, the company’s content strategy is driving better user retention and leading to better platform profitability.

Spotify recently introduced price increases in some markets, but the higher rates resulted in lower subscriber churn than the previous price increase. That means the higher rates are helping the bottom line. The company’s operating profit margin was 7% in the second quarter, completely reversing the previous quarter’s operating loss, and it’s expected to continue to grow over the long term.

Analysts expect the company’s adjusted earnings to reach $10.41 per share in 2026 — an exponential improvement from the negative earnings of the past. Since Spotify’s operating margin is still relatively low for a subscription service, there could be significant headroom for further margin improvement and solid earnings growth that could support market-beating returns.

Is it worth investing $1,000 in Tesla now?

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John Ballard has positions in Tesla. The Motley Fool has positions in and recommends Spotify Technology and Tesla. The Motley Fool has a disclosure policy.

2 Unstoppable Growth Stocks That Could Destroy the S&P 500 in the Next 5 Years was originally published by The Motley Fool