It may come as a surprise to some, but the most money is made in investing by buying and holding solid growth stocks for the long term rather than jumping in and out of the market. Share prices are notoriously unpredictable in the short term, so frequent trading can lose you a ton of money.
Instead, park your money in well-run, quality companies that can grow their revenue, earnings, and free cash flow. Over time, as the businesses become more valuable, share prices should rise in tandem, netting you attractive capital gains.
Businesses that enable you to grow your wealth should have certain characteristics. They should demonstrate steady increases in revenue over the years and preferably be generating consistent free cash flow.
Such companies should also possess a robust business model and clear catalysts that can help them grow sustainably. Having a large and growing total addressable market is another attractive feature that should assure investors that a business still has a long growth runway.
With these criteria in mind, here are three attractive growth stocks that you should own for the long term.
Image source: Getty images.
Freshworks
Freshworks (FRSH 0.12%) uses artificial intelligence (AI) on its cloud platform to provide customer relationship management and IT service management. The company counts brands including American Express, Bridgestone, and Fila as its customers.
Freshworks has not only demonstrated consistent growth in revenue over the past three years, but it also saw its gross margin increase steadily, as shown below.
| Metric | 2021 | 2022 | 2023 |
|---|---|---|---|
| Revenue | $371.022 million | $497.999 million | $596.432 million |
| Gross profit | $292.992 million | $402.227 million | $493.063 million |
| Gross margin | 79% | 80.8% | 82.7% |
Data source: Freshworks. Fiscal year ended Dec. 31.
As its top line improved, it also generated higher levels of free cash flow: It was $2.3 million in 2021 and leaped to $77.8 million by 2023.
Freshworks continued to display strong financial and operating metrics in the first nine months of 2024. Revenue rose 20.5% year over year to $525.8 million, while gross profit increased by almost 23% year over year to $442 million. The gross margin continued to improve from 82.5% in the previous year to 84.1% in the current period.
Free cash flow more than doubled year over year from $49.2 million to $111.6 million. Customers are also spending more -- those with over $5,000 in annual recurring revenue (ARR) increased by 14.4% year over year to 22,359 while those with more than $50,000 in ARR climbed nearly 33% year over year to 3,008.
The company recently introduced its Freddy AI Agent, a new generation of autonomous service agents that can be easily deployed at customers' workplaces. Management says these agents helped to resolve an average of 45% of customer support requests and 40% of IT service requests while delivering significant productivity and efficiency gains.
Freddy AI Agent can also increase personalization, helping to improve customer stickiness for the company's platform. During its 2023 Investor Day, management identified a total addressable market of $78 billion, a significant runway for the business.
Freshworks intends to continue leveraging AI to create new monetization opportunities, and the future looks bright as it demonstrates growth in revenue, gross margin, and free cash flow.
Confluent
Confluent (CFLT -0.49%) offers a data streaming platform that helps collate and consolidate organizations' real-time data from multiple sources to offer analytics and insights. The company is also enabling generative artificial intelligence (AI) that avoids hallucinations -- a response generated by AI that contains false or misleading information presented as fact -- and allows better access control.
Because of its cutting-edge software, Confluent has seen its revenue and gross margin increase, as shown below.
| Metric | 2021 | 2022 | 2023 |
|---|---|---|---|
| Revenue | $387.864 million | $585.944 million | $776.952 million |
| Gross profit | $250.572 million | $383.529 million | $547.282 million |
| Gross margin | 64.6% | 65.5% | 70.4% |
Data source: Confluent. Fiscal year end Dec. 31.
Although free cash flow over these three years remained negative, encouraging signs point to the business eventually generating positive free cash flow as it continues to scale up.
For the first nine months of 2024, Confluent saw revenue jump 24.6% year over year to $702.4 million. Gross profit climbed by 31% year over year to $512.5 million, with gross margin continuing to improve from 69.4% in the previous year to 73%.
The good news is that operating cash flow nearly turned positive, at negative $1.8 million, versus the prior year's operating cash outflow of $115.9 million. These numbers show that the company is well on its way to generating positive operating cash flow in due course.
Total customers also grew 16% year over year to around 5,680, and customers with ARR exceeding $1 million jumped by 19% year over year to 184. The company is growing its total customer base while also seeing customers spend more on its platform.
Management identified a total addressable market of $60 billion back in 2022. This market looks set to rise by 19% per annum to reach $100 billion by 2025, and it represents a significant opportunity for Confluent to continue growing since its annual revenue has yet to hit $1 billion.
With its annual subscription revenue soaring 66% per annum from 2018 to 2023, the company looks set to maintain this momentum since it is well positioned to benefit from the organizational shift to cloud computing.
Roku
Roku (ROKU 6.42%) is a provider of streaming content and helps its users find what they enjoy watching. The company also works with content publishers to monetize their audiences, and with advertisers looking to reach their target consumer segments.
Roku has steadily grown its revenue from 2021 to 2023 as seen in the table below. Gross margin has come under pressure as cost of revenue from its platform division shot up, but gross profit still managed to increase steadily over time.
| Metric | 2021 | 2022 | 2023 |
|---|---|---|---|
| Revenue | $2.76 billion | $3.12 billion | $3.48 billion |
| Gross profit | $1.41 billion | $1.44 billion | $1.52 billion |
| Gross margin | 51% | 46.1% | 43.7% |
| Free cash flow | $173.237 million | ($149.901 million) | $188.04 million |
Data source: Roku. Fiscal year ended Dec. 31.
The business generated fairly consistent free cash flow every year and has continued to do so this year.
For the first nine months of 2024, revenue rose 16.5% year over year to $2.9 billion while gross profit increased 19.2% year over year to $1.29 billion. There was a slight increase in gross margin from 43.4% to 44.4%, offering hope that Roku has managed to arrest the decline in this metric over the past three years.
Free cash flow came in at $136.2 million for the period, making 2022 seem like a blip as the streaming content provider is on its way to generating free cash flow for three out of the past four years.
The number of its streaming households continues to grow and was up 13% year over year to 85.5 million for the third quarter of 2024. The number of streaming hours also rose 20% year over year to 32 billion over the same period.
Roku announced that it has surpassed 90 million streaming households by the first week of 2025, which would represent at least a 12.5% year-over-year increase over the previous corresponding quarter.
The platform is seeing healthy momentum even as management launched its latest Roku Data Cloud that allows its partners to access, analyze, and use its proprietary TV data. This cloud-collaboration platform enables advertisers, agencies, and partners to obtain accurate information and curate their offerings to suit their target audience, allowing for better results.
The company has continued to add streaming services on its platform, with the latest being Crunchyroll, a global anime brand that offers access to 25,000 hours of anime with more than 2,000 titles.
These initiatives and business developments should help Roku to continue to grow its member base and register more streaming hours, thereby helping the business to continue growing its revenue and free cash flow.
