The S&P 500 index has delivered annualized returns of about 10% since 1957. That closely approximates the growth in the average company's earnings. If you want to beat the market, you want to look for companies that can grow their earnings well above the average.
Here 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) shares delivered an 8,500% return to shareholders over the last 12 years, but the stock hasn't hit new highs since 2021. However, the stock has followed this pattern before. The shares previously delivered modest gains between 2014 and 2018 before rocketing tenfold to their previous high of $414. Here's why another bull run is coming.
Despite higher interest rates and increasing competition in the electric vehicle (EV) market, Tesla delivered a strong second-quarter update, with automotive revenue up 14% over the first quarter. Tesla remains one of the most profitable car manufacturers in the world. It generated $8.1 billion of adjusted net income over the last four quarters on $95 billion of revenue.
Tesla will emerge from this downturn in a stronger competitive position from its efforts to lower costs per vehicle. The EV opportunity remains massive, 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 capture significant share of the market.
CEO Elon Musk has previously said he believes Tesla could earn $1 trillion in profit one day. That's a very long-term goal, but it shows that management is increasingly investing in initiatives that will raise the company's margins and drive strong earnings growth over time. A few of these opportunities should kick in within the next five years, such as growing subscriptions for Tesla's self-driving software, energy solutions, and robotaxi service.
Analysts expect Tesla's earnings to nearly double next year, which could be the beginning of a trend. As automotive revenue returns to growth and Tesla continues to improve its profit margin, the company can deliver high-double-digit earnings growth to support market-beating returns.
2. Spotify Technology
Spotify Technology (NYSE: SPOT) shares are up 128% over the last 12 months, driven by growing demand for its premium subscription plans. The company is juicing its profits by releasing more content and raising prices, and these actions could drive more market-beating returns for shareholders.
There are not many services reporting double-digit revenue growth in this challenging retail environment. But music and podcast listeners clearly place a high value on their monthly Spotify subscription. Spotify's total monthly active users grew 14% year over year in Q2 to reach 626 million.
Spotify is dominating the audio market by expanding into audiobooks and podcasts. It posted premium subscriber growth of 12% year over year last quarter, which is helping to generate more revenue. Most importantly, the company's content strategy is driving better user retention and leading to better profitability for the platform.
Spotify recently implemented price increases in certain markets, but the higher rates have driven less subscriber churn than the previous price increase. This means higher rates are benefiting the bottom line. The company's operating profit margin was 7% in the second quarter, completely reversing the year-ago quarter's operating loss, and it's expected to continue moving higher over the long term.
Analysts expect the company's adjusted earnings to reach $10.41 per share in 2026 -- an exponential improvement compared to negative earnings in the past. With Spotify's operating margin still relatively low for a subscription service, there could be substantial headroom for more margin improvement and robust earnings growth that can support market-beating returns.
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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 Crush the S&P 500 Over the Next 5 Years was originally published by The Motley Fool