Forecasting a company’s future growth is a great way to understand which businesses can meaningfully expand over the long term and increase wealth, and which are simply overhyped.
Let’s take a look at a pair of hot growth stocks whose underlying businesses likely have what it takes to triple your investment before the end of the decade. While either can be a risky investment, both have reliable ways to make shareholders richer.
1. Novo Nordisk
Novo Nordisk (NGO -0.13%) is a Danish pharmaceutical company that has been in the news lately thanks to its semaglutide drug. The Food and Drug Administration (FDA) has approved the drug in the US to treat obesity, which is sold under the trade name Wegovy. In addition, semaglutide is also approved for the treatment of type 2 diabetes and is sold under the brand names Ozempic, an injectable product, and Rybelsus, a pill.
The company is also currently studying semaglutide for other indications, such as Alzheimer’s disease, in late-stage clinical trials. And if the fact that its obesity care segment grew 84% in 2022 means anything at all, it’s that this company has a lot of growth on the way.
Over the past 10 years, Novo Nordisk has grown its annual diluted earnings per share (EPS) by an average of 10.1% per year, reaching $3.59. Now, thanks in large part to expected semaglutide earnings, Wall Street analysts are projecting an average long-term EPS growth rate of 20.7% per year. At this rate, its 2022 net income of $7.8 billion will expand to about $26.7 billion by 2030. And if its price-to-earnings (P/E) ratio remains at 44.2, its market cap could top $1.1 trillion — more than three times its current value of $354 billion.
So basically, Novo Nordisk stock could indeed triple over the next 6.5 years. But that doesn’t mean you should bet the bank that it will happen. Even with a portfolio of great products, growing revenue by roughly 20% per year for more than half a decade is quite difficult for a large and established business.
In addition, there is always the chance that market phenomena will cause the P/E ratio to compress, meaning that it will take significantly faster growth rates in net income to triple its value compared to today. Nevertheless, this stock is not very risky thanks to the drugs sought and the likely outcome of its development process. So don’t be afraid to buy a few stocks as the purchase will probably pay off in the years to come.
SNDL (SNDL -0.65%) is a Canadian cannabis and alcohol business that doesn’t exactly have a blockbuster drug like semaglutide for sale. Instead, SNDL’s path to tripling by 2030 involves surviving a decidedly toxic cocktail of market and economic factors that currently appear to be hurting its rivals to the point that they will be relatively easy to buy out.
In short, it’s a bad time to be a cannabis company. After experiencing a brutal crash from the bubbly craze of 2021, the market is currently avoiding cannabis stocks. Most public businesses in the industry are unprofitable, and the piecemeal nature of marijuana legalization in the US remains a major stumbling block.
More importantly, North American marijuana markets are being penalized by companies driving down cannabis prices due to the excess weed being spread around compared to the level of demand. There are too many commodities chasing too few consumers.
But for a business like SNDL, these conditions create the perfect setup. It currently has C$207 million in unrestricted cash and no debt. Due to significant write-downs from its latest set of acquisitions, it is not profitable; however, it made C$28.6 million in cash from operations in the fourth quarter, and its cash balance fell by just C$6.7 million in 2022.
At the same time, as a result of some of its previous investments and lending to other marijuana companies in the US, it may acquire a majority ownership of one or two of the multi-state operators (MSOs) there. That could propel its top line to surpass C$1 billion before the end of 2023, up from C$712.2 million in 2022.
To triple, SNDL’s market capitalization would need to reach approximately $1.2 billion, up from today’s market cap of nearly $400 million. But it currently has a price-to-sales (P/S) ratio of just 0.6, far below most of its peers, not to mention the market’s average P/S of 2.4. Let’s assume it succeeds with its plans to acquire control of a US MSO or two so that it reaches C$1 billion in sales by the end of 2023, which is actually a bit lower than analysts’ forecasts.
If it can then simply grow its annual earnings by a measly 8.5% per year in the six years after 2023, it will easily triple to reach a market cap of $1.2 billion, provided its P/S widened a bit to reach a still super-low value of 1.0. But if its valuation corrects to a level that’s just within the market average, it could triple while growing even more slowly — and with the abundance of acquisition opportunities, slower growth is unlikely. However, its stock could also lose a lot of value between now and 2030, thanks to difficult market conditions. So don’t buy it unless you are brave.