Growth stocks can help you build lasting wealth. But it’s important to stay focused on the company’s performance and not necessarily the stock’s. Even the best companies will see their share prices decline down in a market sell-off, but if you consistently buy shares of growing companies over many years, you should do very well.
Here are two growing companies to buy today that offer attractive long-term return potential.
1. Dutch Bros
A ripe field to find simple companies that can generate massive returns over time is the restaurant industry. Discovering successful brands in the early innings of expanding across the U.S. has been a proven way to find monster stocks, and the beverage chain Dutch Bros (BROS -0.32%) could be next.
The company went public just a few years ago, after its founding in 1992 by brothers Dane and Travis Boersma in Oregon. After starting out selling espresso from a pushcart, it has grown to 950 shops across 18 states, generating $1.1 billion in trailing-12-month revenue. It’s clearly a concept that is resonating with customers.
Dutch Bros has expanded beyond coffee to lemonades, teas, smoothies, and energy drinks, and it’s starting to test food offerings in select shops. Management will need to be careful about straying too far from its core competency, but the menu expansion could help Dutch Bros build brand awareness and expand its market potential.
The company’s performance has been solid. Revenue has consistently risen above 30% year over year over the last few years, with the most recent quarter showing a 28% increase. This is driven by single-digit same-shop sales growth, with new shop openings driving about two-thirds of revenue growth in the most recent quarter.
It’s always important to check that a restaurant business is growing profitably, because fast-growing restaurants can get into financial trouble by expanding too fast. On that note, Dutch Bros is showing the potential to increase margins as the business scales up. Net income jumped from $13.4 million in the third quarter of 2023 to $21.7 million a year later.
The stock rocketed 51% following its third-quarter earnings results in November, but the shares still trade at a reasonable price-to-sales multiple (P/S) of 4.1 — an average number for a growing restaurant business. This is a promising growth stock to buy and hold for the next 20 years.
2. Toast
Toast (TOST -1.17%) is another early-stage investment opportunity in the restaurant industry. It offers an intuitive software-as-a-service (SaaS) platform designed for the complex needs of restaurant operators.
The company has delivered consistent growth despite a weak spending environment for business software this year. Revenue grew 26% year over year in the third quarter, driven by an 28% increase in the number of restaurants using its platform. This high rate of growth indicates massive market potential for Toast’s offering.
The strong growth comes as the company continues to release new features to help restaurants reach new customers. It now offers small businesses the ability to create their own apps in iOS and Android to handle ordering and delivery. This could win over a lot of smaller restaurant operators that need this functionality to compete with larger chains.
Toast is also in the early stages of expanding internationally and exploring market expansion across other markets like retail. Nearly 127,000 restaurants are using its software, and management believes it can potentially serve multiples of that number. In the U.S. alone, it still has a small share of total restaurant locations.
As the company scales up, it is also showing improving profitability. Net income rose to $56 million in the third quarter, reversing a loss a year ago.
The improvement on the bottom line helped send the stock higher toward the end of 2024, but Toast still trades at a P/S multiple of 4.5, which is fair for a fast-growing SaaS company.
John Ballard has positions in Dutch Bros and Toast. The Motley Fool has positions in and recommends Toast. The Motley Fool recommends Dutch Bros. The Motley Fool has a disclosure policy.
