As the 2023 stock-market rally continues, this is a good time to look further ahead to see which companies are expected to show the highest growth rates through 2025.
As the market is being propelled by technology stocks, investors are focused on sales growth. And we are seeing some knockout numbers this year. Nvidia Corp.
NVDA,
for example, increased revenue for the first quarter of its fiscal 2024, ending April 30, by 19% from the previous quarter, although sales were down 13% from the year-earlier quarter. (That is one reason you shouldn’t only look at year-over-year comparisons.) The company also predicted a sequential 50% increase in sales for its current fiscal quarter, which ends on July 31.
So if we use the already-lifted calendar 2023 estimates as a baseline, we can take a more forward approach than the usual 12 months (which drives forward price-to-earnings and price-to-sales ratios) by looking out through 2025 for Nvidia and the rest of the S&P 500
SPX.
Then we can make our screen a bit more conservative by setting minimum parameters for increases in earnings and free cash flow.
Beginning with the components of the benchmark S&P 500, we looked at consensus calendar-year estimates for 2023, 2024 and 2025 revenue, earnings per share and free cash flow per share, among analysts polled by FactSet. About 20% of S&P 500 companies have fiscal years that don’t match the calendar, so this approach provides uniform sets of data for comparison. (A company’s free cash flow is its remaining cash flow after capital expenditures. This is money that can be used for expansion, to raise dividends, buy back shares or for other corporate purposes.)
In case you are wondering how the weighted estimates would turn out for the full index, here they are for the SPDR S&P 500 ETF Trust
SPY,
using consensus estimates for 2023 and 2025:
- Estimated sales CAGR: 5.1%.
- Estimated EPS CAGR: 12.2%.
- Estimated FCF CAGR: 14.8%.
To screen individual companies in the S&P 500, we began by eliminating those for which any of the calendar year estimates were negative or unavailable. That brought the list down to 246 companies. We further narrowed the list as follows:
- Expected compound annual growth rate (CAGR) of at least 15% for sales from calendar 2023 through calendar 2025.
- Expected EPS CAGR of at least 10%.
- Expected FCF CAGR of at least 10%.
Thirteen companies passed the screen. Here they are, sorted by expected sales CAGR from 2023 through 2025:
| Company | Ticker | Industry | Two-year estimated sales CAGR through 2025 | Two-year estimated EPS CAGR through 2025 | Two-year estimated FCF CAGR through 2025 |
| Tesla Inc. |
TSLA | Motor Vehicles | 28.2% | 39.4% | 59.8% |
| Enphase Energy Inc. |
ENPH | Semiconductors | 23.2% | 30.5% | 26.1% |
| Take-Two Interactive Software Inc. |
TTWO | Videogames | 22.1% | 59.9% | 299.6% |
| ServiceNow Inc. |
NOW | Packaged Software | 21.8% | 24.4% | 22.5% |
| SolarEdge Technologies Inc. |
SEDG | Electrical Products | 19.7% | 19.9% | 25.6% |
| DexCom Inc. |
DXCM | Medical Specialties | 19.6% | 33.0% | 24.7% |
| Eli Lilly and Co. |
LLY | Pharmaceuticals | 19.2% | 35.5% | 26.3% |
| Fortinet Inc. |
FTNT | Information Technology Services | 19.2% | 21.2% | 38.8% |
| CoStar Group Inc. |
CSGP | Internet Software/ Services | 18.0% | 24.2% | 42.0% |
| EQT Corp. |
EQT | Oil & Gas Production | 16.7% | 67.8% | 98.5% |
| Monolithic Power Systems Inc. |
MPWR | Semiconductors | 16.4% | 17.1% | 19.0% |
| Advanced Micro Devices Inc. |
AMD | Semiconductors | 15.8% | 35.6% | 66.6% |
| Illumina Inc. |
ILMN | Biotechnology | 14.5% | 84.5% | 69.3% |
| Source: FactSet | |||||
Click on the tickers for more about each company, fund or index.
Nvidia didn’t pass the screen because a consensus FCF estimate wasn’t yet available for calendar 2025. For sales, the company’s expected CAGR from the estimated calendar 2023 baseline through 2025, is 27.4% and its expected EPS CAGR is expected to be 33.7%. The company’s estimated FCF for calendar 2023 is $6.28 and analysts expect that to increase by 48% to $9.26 in 2025.
Many of these stocks are priced high when compared with the S&P 500 by traditional valuation measures, based on 12-month consensus estimates for earnings and sales. The forward price-to-earnings ratio for the index, based on weighted estimates among analysts polled by FactSet is 19.8, and the index’s forward price-to-sales ratio is 2.5.
Leaving the group of 13 companies that passed the screen for expected CAGR in the same order, here are the two valuation ratios and a summary of analysts’ opinions:
| Company | Ticker | Forward P/E | Forward price/ sales | Share “buy” ratings | July 19 price | Consensus price target | Implied 12-month upside potential |
| Tesla Inc. |
TSLA | 70.3 | 8.0 | 43% | $291.26 | $235.02 | -19% |
| Enphase Energy Inc. |
ENPH | 28.7 | 7.5 | 73% | $185.49 | $238.90 | 29% |
| Take-Two Interactive Software Inc. |
TTWO | 32.1 | 4.1 | 73% | $152.01 | $152.96 | 1% |
| ServiceNow Inc. |
NOW | 55.7 | 12.4 | 90% | $603.25 | $587.82 | -3% |
| SolarEdge Technologies Inc. |
SEDG | 23.2 | 3.3 | 75% | $273.75 | $359.88 | 31% |
| DexCom Inc. |
DXCM | 101.3 | 13.3 | 86% | $133.63 | $142.52 | 7% |
| Eli Lilly and Co. |
LLY | 43.2 | 12.3 | 71% | $453.56 | $472.97 | 4% |
| Fortinet Inc. |
FTNT | 48.8 | 10.2 | 69% | $78.69 | $77.97 | -1% |
| CoStar Group Inc. |
CSGP | 67.2 | 13.8 | 86% | $91.61 | $95.69 | 4% |
| EQT Corp. |
EQT | 12.0 | 2.0 | 72% | $39.87 | $46.43 | 16% |
| Monolithic Power Systems Inc. |
MPWR | 44.3 | 13.6 | 71% | $574.51 | $554.70 | -3% |
| Advanced Micro Devices Inc. |
AMD | 32.2 | 7.3 | 66% | $116.43 | $133.85 | 15% |
| Illumina Inc. |
ILMN | 80.8 | 5.5 | 43% | $184.53 | $234.26 | 27% |
| Source: FactSet | |||||||
Tesla Inc.’s
TSLA
stock has soared 125% this year and is now well ahead of the analysts, who no longer have majority “buy” ratings on the stock, and whose consensus price target is 19% below the closing price on July 19.
Two solar-energy equipment makers are on the list — Enphase Energy Inc.
ENPH
and SolarEdge Technologies Inc.
SEDG,
which has the second-lowest forward P/E and price-to-sales ratios on the list. They are moderately higher than those of the S&P 500, despite such a high expected two-year CAGR. This underlines the mismatch between 12-month price targets, upon which analysts working for brokerage firms base their targets, and longer-term considerations for investors.
The cheapest stock on the list per the two valuation ratios is EQT Corp.
EQT.
The energy sector has had the lowest valuations among the 11 sectors of the S&P 500 for years.
You can read more about this industry group, including two related stock picks, here.
Don’t miss: Stocks in this left-behind sector are expected to rally as much as 33%
