The secret to successful investing is found in the future. Past performance is no guarantee of upcoming returns, so you need to forget about the rearview mirror in favor of a forward-thinking telescope. The farther into the distant future you can see, the better.
So we asked a few of your fellow investors here at The Motley Fool to share some of their top growth-stock ideas right now. They came back with a deep look into the far future, recommending that you take a closer look at Red Hat (NYSE: RHT), General Motors (NYSE: GM), and Varonis Systems (NASDAQ: VRNS).
Read on to see why.
Protecting clients from their own employees
Dan Caplinger (Varonis Systems): Most people — some all too well — know about the threats to your personal information from cyber attacks. There’s been plenty of news coverage about major corporations having fallen prey to external attacks from hackers, with the result of exposing the bank account and credit card information, Social Security numbers, and other vital data of tens of millions of customers.
It’s easy to see external parties as the source of these attacks, but what Varonis Systems has found is that companies also face big threats from within. Whether it’s an inadvertent mistake by an employee that leaves a key system vulnerable or a disgruntled worker’s deliberate move to retaliate against perceived unfair treatment, enterprises can’t afford to be vulnerable to internal attacks.
Varonis makes it easier for companies to counter these threats. With software that identifies and tracks users and limits access to vital data to only those users who truly need it, Varonis helps its customers optimize their operational efficiency while minimizing the risk of adverse data events.
After setting a brisk pace of growth early in its history, Varonis is starting to see signs of a possible short-term slowdown. Yet with modest projections, the company still sees itself growing revenue at a 23% to 25% clip during 2018. More importantly, Varonis has a huge addressable market, and if it can keep innovating to stay ahead of potential competitors, the company could easily accelerate its growth in future years back toward its levels from the recent past.
Value now, growth later
Tim Green (General Motors): Is it far-fetched to call stodgy old GM a growth stock? I don’t think so. Thanks to the $1 billion acquisition of Cruise Automation back in 2016, GM has emerged as one of the leaders in autonomous vehicles. Using a modified version of its all-electric Chevy Bolt, GM plans to launch fleets of autonomous taxis in dense urban environments in 2019.
To be fair, companies make all sorts of plans that never pan out. But GM got a big vote of confidence late last month when it announced that a fund affiliated with SoftBank was investing $2.25 billion in Cruise Automation. SoftBank will have a nearly 20% stake in the unit when the deal is done, which can be converted into GM stock after seven years. GM will invest an additional $1.1 billion, giving Cruise enough capital to roll out its autonomous taxi service. Cruise is now valued at about $11.5 billion based on the SoftBank deal.
GM isn’t your typical growth stock, and revenue may very well decline as demand for vehicles wanes in the U.S. But looking ahead five years, GM is positioned to be at the center of a revolution in transportation. There’s plenty of competition, and there’s plenty that could go wrong. But with GM, you get an extremely cheap stock, a rock-solid dividend, and an awful lot of long-term growth potential.
Red Hat will stay red hot
Anders Bylund (Red Hat): Ten years ago, Red Hat was a forgettable little minnow in the enterprise software industry. Archrival Microsoft had the Linux vendor’s annual revenue and free cash flow beat by a ratio of 100 to 1.
The differences are still large, but Red Hat has come a long way since then. Having quadrupled its cash flow and quintupled the top-line revenue stream, Red Hat’s financial figures are now about one-fortieth of Microsoft’s equivalents. And I’m not comparing Red Hat to any slouches here, as Redmond has nearly doubled its own cash flow over the same period.
But Red Hat still has a lot of market share left to steal from the likes of Microsoft. Enterprise software is a huge market, widely expected to see total sales of nearly $400 billion in 2018. Red Hat’s annual slice of the pie stops at just $2.9 billion today. As the company continues to expand its target markets while building a rock-solid reputation out of its proven successes, Red Hat’s growth story should have legs for many years to come.
At the moment, Red Hat is cementing a central position in the cloud computing market with top-shelf products such as its namesake Red Hat Enterprise Linux, the OpenStack cloud platform, OpenShift software containers, and Ansible automation tools. Built on a foundation of open-source software development, all of these products are designed to work well alongside other companies’ solutions.
In short, I see no reason to expect Red Hat’s market share gains slowing down any time soon. Meanwhile, the enterprise market itself keeps expanding. Put it all together and you get a growth stock for the long haul.