Investing large sums of money can be nerve-racking. This can be particularly true when building a growth-focused portfolio. Yet, by looking under the hood of some well-known companies, I think it's possible to construct a portfolio that stands the test of time.
Here's how I would build a hypothetical $50,000 portfolio today using some of my favorite growth stocks.
Image source: Getty Images.
Spotify Technology
First, there's Spotify Technology (SPOT -0.07%). I'll allocate $15,000, or 30%, of my hypothetical portfolio to Spotify. Here's why:
The company is making the transition from a promising upstart to a streaming superstar. Indeed, since the start of 2023, the stock has advanced by more than 500%.
Like Netflix before it, Spotify is widening its moat and building its competitive advantage by growing its total user base and, crucially, its subscriber base.
In its most recent quarter (ended Sept. 30, 2024), the company reported:
- 640 million monthly active users (MAUs), up 11% year over year.
- 252 million premium subscribers, a 12% increase from one year earlier.
- 11.4% operating margin, up from 1% a year ago.
Ultimately, Spotify's business is simple. First, the company must grow its user base and subscribers to generate revenue. Then, it must restrain costs to deliver profits and free cash flow for its shareholders.
SPOT net income (TTM), data by YCharts; TTM = trailing 12 months.
You can see that Spotify is executing that plan superbly. As revenue, profits, and free cash flow continue to grow, the company can deliver further shareholder value.
Lululemon Athletica
I'm allocating $10,000, or 20%, of my hypothetical portfolio to Lululemon Athletica (LULU -1.50%). That's because every portfolio needs some diversification, and this hypothetical portfolio needs some retail exposure.
Lululemon caters to high-end customers, meaning that while swings in customer spending can dent its stock, its wealthier clientele tends to be more resilient than bargain retailers.
What's more, as a still-young company in the retail space, it maintains a high growth rate. It now generates roughly $10 billion in annual sales, with quarterly revenue growing about 9% year over year.
The analyst consensus is for sales to grow about 9.5% this year and then a further 7.3% in 2026, bringing total revenue to $11.3 billion two years from now.
In short, Lululemon still has a significant growth runway, and that's why the stock makes the cut and finds a place within my hypothetical portfolio.
Meta Platforms
I'm allocating $25,000, or 50%, of my hypothetical portfolio to Meta Platforms (META -0.94%).
There are many reasons to make it the cornerstone of a portfolio, but I want to focus on four: its size, growth, margins, and free cash flow.
Let's start with the company's size. Meta is gigantic in terms of its market cap and user base. As of this writing, the market cap was $1.5 trillion, making it the sixth-largest American company. And it has more than 3.3 billion daily average users (DAUs).
Given its enormous size, Meta generates vast amounts of revenue. In its most recent quarter (ended Sept. 30, 2024), the company reported $40.6 billion in revenue, up 19% year over year. About 97% of that revenue came from selling digital ads on its various platforms.
As for margins, Meta is very efficient at converting revenue into profits. The company has gross margins of about 80% and operating margins of around 43%. That means it reliably generates tens of billions of profit each quarter.
Lastly, Meta has a history of generating ample free cash flow, including more than $52 billion over the last 12 months. That allows management to drive shareholder value in several ways:
- Paying dividends
- Buying back stock
- Paying down debt
- Buying other companies
In short, Meta's business is fine-tuned for success. And that's why I'm making it the cornerstone of my hypothetical portfolio.
