If you invested $5,000 in a low-fee broad-market index fund today and waited 20 years, based on the average annual return of Wall Street, that investment would have grown in value to more than $23,000.
That's a pretty nice gain, but if you're committed to a long-term growth strategy, there are ways you can do even better. One method is to identify smaller companies that are innovators in promising growth industries, but that haven't yet reached their potential. For example, people who bought Adobe (ADBE 1.57%) 20 years ago when it was a small player in a fast-growing industry and held on have multiplied their investments by nearly 50 times.
These three growth stocks are compelling opportunities today that could turn into giants two decades from now, making them strong candidates for your retirement portfolio.
1. Alteryx
Alteryx (AYX) creates data science and machine learning products for businesses across numerous industries. With the help of its automation software, data analysts can produce much more powerful insights. These tools also reduce the need for coding skills, and increased efficiency can help get the job done with fewer employees.
This makes Alteryx an interesting, somewhat under-the-radar play on the big data trend. It's a mid-cap company, which leaves it plenty of room to grow as data analytics becomes more entrenched in business. It does face competition, including from giants such as Microsoft (MSFT 1.58%) and Oracle (ORCL 0.69%). But Alteryx also notes that many of its potential customers still use inefficient systems that involve manually updating shared spreadsheets, so it has a large number of potential customers with unaddressed needs. Over time, more companies will adopt automated solutions that will keep them competitive and lean, and Alteryx should be one of the primary beneficiaries in its niche.
Analysts expect 20% annualized growth from Alteryx over the next few years, though it has been smashing consensus expectations and growing by more than 50% annually. Despite this, Alteryx's price-to-sales ratio is under 10, which is low for a high-growth-potential tech stock. Investors have been underwhelmed by the company's guidance, and some departures of key executives haven't helped. High-growth tech stocks have been volatile this year, and any bad news about their outlooks can send share prices tumbling.
Alteryx has a highly respected product suite, limited competition, and lots of growth opportunities, and the stock trades at a reasonable price that leaves room for appreciation. Those ingredients look like the recipe for a home run.
Image source: Getty Images
2. Blackline
Blackline (BL 4.50%) is a midcap fintech company that doesn't get as much attention as certain of its industry peers, but there's still a lot of potential here. It offers cloud-based accounting software with process automation, data insights, and collaboration tools, enabling large organizations to efficiently manage their finances. Blackline also integrates with numerous popular enterprise data systems, making it easier for customers to adopt the software.
The value of Blackline's service is pretty obvious, especially if you know any accountants or financial analysts who participate in monthly closing. It's hectic, time-consuming, and stressful.
Evidence of the value that Blackline creates can be found in its excellent customer growth and retention rates. It had 3,600 clients as of the end of last quarter, up by 15% year over year. And its 106% net revenue retention rate shows that not only are its customers staying with it, but expanding their relationships.
Blackline's revenue has grown by more than 21% so far this year, adding to its streak of several straight years of growth in excess of 20%. The company is on track to exceed its guidance for 2021, and forecasts for next year call for roughly 20% sales growth. It isn't consistently profitable, but it is cash flow positive, having produced nearly $32 million in free cash flow so far this year.
Trading at a price-to-sales ratio above 18, Blackline isn't cheap. It's also likely to encounter competition from other enterprise finance software vendors, both incumbents and smaller entrants. Nonetheless, Blackline's products are clearly valuable, and it still has tons of room for expansion. Even with an aggressive valuation, a 20-year time horizon will be more than enough time for this relatively small disruptor to produce big-time returns.
3. Splunk
Big data company Splunk (SPLK) has had its ups and downs over the years. It creates software that supports businesses in the collection and analysis of their operational data. This improves efficiency, collaboration, and management across organizations. Splunk aims to improve its customers' cybersecurity and product development, and assist them in their overall digital transformations.
That's an attractive value proposition -- most businesses would benefit from better monitoring themselves so that they could accelerate product development while eliminating inefficiencies.
Growth and customer retention are usually clear evidence of product quality. Unfortunately, it's not so straightforward with Splunk.
The company recently transitioned to the SaaS subscription model, but this distorted its reported sales growth. Instead of recognizing a big chunk of revenue at the time of an initial software sale, SaaS subscription revenue is recorded periodically over time. That caused reported revenue to drop, but Splunk has actually been growing. The company quickly grew from 350 to 500 enterprise-level clients. It's also reporting cloud annual recurring revenue growth consistently above 70%, and has a 130% net retention rate. New customers are signing on, while existing customers are sticking around and spending even more on Splunk's services. The company is also free-cash-flow positive so far this year.
The stock is well below its 2020 highs, and it trades at a price-to-sales ratio of 11. Splunk will certainly face competition in the next few years, but it appears to be emerging from a successful transition and is competing exceptionally well in a high-growth industry. There's an enormous growth opportunity for the company over the next two decades, which makes this an opportune time to get in on the action.
