The stock market is in the middle of a challenging period. The Nasdaq Composite technology index has declined by 5.9% since the beginning of August as investors digest seasonal weakness, combined with a continued increase in interest rates.
But these moments are a great reminder to focus on the long term, because nothing drowns out stock market noise quite like time. In fact, the Nasdaq Composite has delivered a gain of 352% over the last 10 years, which translates to a compound annual return of 13.4%!
Investors could buy an exchange-traded fund (ETF) to track the performance of that index. But those with a higher risk appetite might prefer to buy fast-growing individual stocks instead, which have the potential to outperform the broader market.
Here, I'll share two stocks that could potentially help you turn a $200,000 investment into $1 million over the next 10 years if these companies continue to execute well. And, of course, you certainly don't have to start with such a large sum of money.
1. Zscaler: A leader in cybersecurity
Consulting firm PwC surveyed 4,410 CEOs in early 2023, and 25% of them said their business will be either "highly" or "extremely" exposed to cyber risks over the next five years. Additionally, when they were asked how they planned to navigate geopolitical risks, the top answer was to invest more money in cybersecurity. As more businesses operate online, they are increasingly exposed to around-the-clock-threats from malicious actors stationed all over the world.
Zscaler (ZS 0.25%) is one of the leading providers of cybersecurity software, with a specific focus on guarding customers' digital environment online. It has one of the largest security clouds in the world, protecting over 7,500 business customers and inspecting more than 320 billion transactions per day. It's underpinned by artificial intelligence (AI) for faster incident response and more advanced protection, with Zscaler's models ingesting a whopping 500 trillion data points every day.
The company is also a specialist in zero trust identity security. Businesses are increasingly reliant on remote workers, and credentials based on a simple username and password configuration can leave a gaping security vulnerability. There's no way to tell if an employee is actually signing onto the network, or if those details have been stolen. Zscaler's Zero Trust tool treats each sign-on attempt as hostile, analyzing its location and the device being used to confirm it's truly an authorized person.
Plus, Zscaler's Zero Trust only connects the employee to the digital applications they require to complete their job. Therefore, if an identity breach does occur, the hacker can't jump across to other assets or compromise the entire network.
Based on Zscaler's $1.6 billion in revenue during its fiscal 2023 (ended July 31) and the company's current valuation of $24 billion, its stock trades at a price-to-sales ratio (P/S) ratio of 15. Assuming that P/S ratio remains constant, Zscaler would have to grow its revenue by 17.5% per year for the next 10 years (taking it to $8 billion annually) to warrant a fivefold increase in its stock price.
Is it possible? Well, Zscaler has publicly disclosed financial information going back to 2016 and, since then, it has grown its revenue at a compound annual rate of 53.5%! To be clear, that rate has slowed recently; the company's fiscal 2023 revenue grew by 48% on the back of the challenging economic environment, and it expects fiscal 2024 revenue to grow by just 27%.
However, demand for cybersecurity software will likely explode over the long term, so I would expect Zscaler's revenue growth to stabilize above the 17.5% level it needs to potentially turn $200,000 to $1 million by 2033.
2. Bill.com: A small-business software powerhouse
Elevated inflation and rising interest rates are forcing households to tighten their budgets, and the knock-on effects of that reduced spending directly impact small businesses. Bill.com (BILL -1.82%) serves small to mid-sized enterprises exclusively, yet despite experiencing a slowdown recently, it's still growing its revenue at an incredible pace.
The company has three core software products. Its flagship cloud-based digital inbox helps businesses aggregate incoming invoices neatly into one place, where they can pay them quickly and log each transaction in their choice of bookkeeping software. Bill.com also owns Invoice2go, which takes care of the other side of the equation by generating invoices and tracking incoming payments. Finally, Divvy is Bill.com's expense management and budgeting platform.
The three brands serve a combined 461,000 businesses, and Bill.com is partnered with over 7,000 accounting firms, which recommend its software to their clients, so new customers are always flowing in. The company estimates its addressable market could include a whopping 70 million small and mid-sized businesses worldwide, so it has barely scratched the surface of its opportunity.
Based on Bill.com's $1.06 billion in revenue during fiscal 2023 (ended June 30) and the company's current valuation of $11.9 billion, its stock trades at a P/S ratio of 11.2. Assuming that P/S ratio remains constant, Bill.com would need to generate $5.3 billion in annual revenue by 2033 to warrant a fivefold increase in its stock. As I touched on earlier, it would take an annual growth rate of 17.5% between now and 2033 to achieve that (any number growing by 17.5% per year will rise by five times over a 10-year period).
Bill.com has grown its revenue at a mind-boggling compound annual rate of 74.8% since its earliest publicly reported financials in 2018. In its latest fiscal 2023 year -- even in the face of challenging economic conditions -- it still grew its revenue by 65%! Bill.com's guidance suggests that growth rate could slow to around 23% in fiscal 2024, but the company does have a history of beating its own forecasts.
Plus, Bill.com is slashing costs to focus on profitability, which is partly why it expects growth to slow. That should be well-received by investors in the new year. Nonetheless, given the size of the company's addressable market, there's a high probability its revenue growth will settle comfortably above the 17.5% rate it needs to drive a fivefold increase in its stock over the coming decade.
Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool recommends Bill and Zscaler. The Motley Fool has a disclosure policy.
