Buying and holding great growth stocks is arguably the most effective way to predictably generate wealth over the long term. But finding the best growth stocks is easier said than done.
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To that end, we asked three top Motley Fool investors to each discuss a growth stock that they believe buy-and-hold investors can appreciate. Read on to learn why they chose Pandora Media (NYSE: P), American Tower (NYSE: AMT), and Celgene (NASDAQ: CELG).
Finding growth where it counts
Steve Symington (Pandora Media): I'll admit Pandora doesn't feel like much of a "growth stock" lately, especially when you look at its top line. Revenue last quarter rose a modest 6.3% year over year to $316 million, as 1% growth in its core advertising revenue stream to $223.3 million was bolstered by a 19% increase in subscription sales to $64.9 million and 25% growth in ticketing service revenue to $27.8 million. Meanwhile, Pandora's total listener hours fell 5.6% year over year to 5.21 billion.
Even then, Pandora's future results won't benefit from ticketing service revenue, considering it recently agreed to sell Ticketfly -- a live events-centric platform it acquired for $450 million in 2015 -- to Eventbrite for $200 million.
So where's the upside? First, to be fair, Pandora was quick to point out that last quarter's declining listener hours were the result of a strategic move to actively manage the metric in an effort to optimize margins for its ad-supported service.
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In addition, the move to sell TicketFly was announced in conjunction with a $480 million investment in Pandora from Sirius XM (NASDAQ: SIRI), which should give it the flexibility to hone its focus on its more promising subscription business. After all, total subscribers climbed 20% year over year to 4.71 million last quarter, showing the early fruits of the company's heavy investments in its $4.99-per-month Pandora Plus and $9.99-per-month Pandora Premium services. Over the next few years, Pandora has set a goal of building a $1.3 billion annual subscription business conservatively based on converting around 10% of its U.S. audience as new product tiers are launched and adopted.
So while Pandora may not look like a growth company at first glance, it's strategically growing where it counts as it steadily marches toward sustained profitability. And I think investors who buy now and watch Pandora continue to deliver on its promises stand to win big in the process.
An excellent way to connect on this long-term trend
Matt DiLallo (American Tower): According to Cisco's (NASDAQ: CSCO) Virtual Networking Index forecast, total mobile data traffic in the U.S. is expected to increase by a 35% compound annual rate through 2021 as users consume more data on smartphones, tablets, and other mobile devices. Meanwhile, total global smartphone mobile data traffic is expected to expand by a robust 33% compound annual rate through 2021. These forecasts suggest that the world will need more capacity in the years ahead. That plays right into the hands of American Tower, which is a leading global owner of communications towers.
American Tower will benefit from this trend in two ways. First, because its towers can house several tenants, the company has the capacity to add more tenants to its existing towers. In fact, many of its recent acquisitions, especially internationally, were for single-tenant tower portfolios. As a result, its tenants per tower has gradually declined over the years, going from an average of 2.4 in the U.S. and 1.8 internationally in 2007 to an average of just 2.0 and 1.6 tenants per tower, respectively, last year.
Aside from the built-in growth by adding more tenants to its existing towers, American Tower can continue building and buying additional towers. Acquisitions opportunities should remain plentiful because mobile carriers need capital to upgrade their networks are are finding that towers are non-core assets that are better off owned by companies like American Towers. Further, despite its buying binge over the past several years, the company has ample financial resources to make deals, since it pays out only about 50% of its cash flow in dividends and has a low 4.6 leverage ratio.
These two growth drivers have enabled American Tower to increase its revenue and adjusted funds from operations by a 16% compound annual growth rate since 2007. Meanwhile, with mobile data usage expected to continue growing at a brisk pace in the years ahead, American Tower should keep expanding at a healthy rate for years to come, making it an excellent growth stock to hold for the long-term.
Big irons in growing fires
Cory Renauer (Celgene Corporation): This biotech stock has risen more than 300% over the past five years, and it's positioned to continue outperforming the market for many years to come. Global cancer drug spending in 2015 was a staggering $107 billion, and it's expected to pass the $150 billion mark in 2020. This in part due to new pricey treatments entering the market, but sales of Celgene's Revlimid and Pomalyst continue to surge in part because they're helping multiple myeloma patients live much longer lives.
Higher cancer drug spending is partly due to pricey new treatments entering the space, but sales of Celgene's Revlimid and Pomalyst continue to surge in part because they're helping multiple myeloma patients live much longer lives. This leads to longer treatment durations that helped first-quarter Revlimid sales surge 20% higher than the same period last year, to an annualized $7.6 billion run rate. The same can be said of Pomalyst. First quarter sales of the more recently launched blood cancer treatment jumped 33% on year to a $1.5 billion run rate.
Celgene is also gaining ground in the fast-growing market for autoimmune disorders. The company's first foray into this field has been a smashing success and has plenty of space to run. Easy to swallow Otezla tablets are gaining popularity among psoriasis patients previously limited to injectable options. The drug earned its first FDA approval 2014, and it's already on pace to reach the $1 billion mark this year.
The company's next big autoimmune treatment could be much bigger than Otezla. In May, Celgene announced results comparing its oral multiple sclerosis candidate, ozanimod to one of the most popular injectables, Avonex. After two years, investigators found patients given ozanimod suffered fewer relapses and displayed fewer brain lesions. If the drug earns a widely expected approval, it's sales could top $5 billion each year at their peak, helping the stock deliver outsize returns for investors buying now and hanging on for the long haul.
10 stocks we like better than Pandora Media
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Cory Renauer has no position in any stocks mentioned. Matt DiLallo owns shares of American Tower and Celgene. Matt DiLallo has the following options: long January 2018 $80 calls on American Tower and short October 2017 $120 calls on American Tower. Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends American Tower, Celgene, and Pandora Media. The Motley Fool has the following options: short October 2017 $120 calls on American Tower and long January 2019 $80 calls on American Tower. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.