2 Growth Stocks to Outperform the S&P 500

Investors have the opportunity to accumulate significant wealth over the long term without needing to frequently buy and sell trending tech stocks. If investors adopt Warren Buffett's strategy of acquiring quality companies when their shares are fairly priced, they can find themselves on a path to financial success.

Many investors utilize the S&P 500 (^GSPC 1.00%) as a standard to evaluate the performance of their investments. Historically, the S&P 500 has delivered an average annual return of around 10%. However, individuals can find that a portfolio carefully composed of promising growth stocks can yield even better results. Here are two growth stocks with the potential to surpass the S&P 500 in the next five years.

1. Uber Technologies

The stock of Uber Technologies (UBER -1.81%) has seen impressive growth, more than doubling in value since 2022. Analysts forecast that the company's earnings could grow at an annualized rate of 41% over the next few years, suggesting it may generate returns that outpace the market.

Uber is experiencing a rise in user engagement, especially with its food delivery service, Uber Eats. Revenue for the third quarter (Q3) registered a 20% increase year-over-year, which management attributes to enhancements in service quality along with increased customer satisfaction.

Uber operates as a profitable business, generating income from the fees charged to drivers and merchants who utilize its platform. Additionally, the company is tapping into growing revenue streams from advertising and its Uber One membership program. Advertising revenue surged nearly 80% in the recent quarter, while Uber One has attracted over 25 million members. These new revenue streams are propelling operating income to grow at a faster pace than overall revenue, with a staggering 169% jump in Q3 compared to the same period last year.

As a prominent player in the expanding ride-hailing sector, which is projected to reach a value of $212 billion by 2029, according to Statista, Uber’s stock appears to be attractively priced at a forward price-to-earnings multiple of 21, particularly when compared to the S&P 500's forward P/E ratio of 23.5. Investors should anticipate that this stock will surpass market performance over the next five years.

2. Meta Platforms

Meta Platforms (META 0.24%) shares have continued to reach new heights in 2024, and the company looks well-positioned for further gains in 2025 and beyond. Analysts predict that Meta's earnings may grow at an annualized rate of 17% in the upcoming years.

Meta generates revenue primarily through advertising on platforms like Instagram and Facebook. The company’s trailing revenue hit $156 billion, and management recognizes that opportunities in artificial intelligence (AI) could further enhance its core business model.

In Q3, Meta reported a 19% year-over-year revenue increase, largely driven by the success of its new conversational assistant, Meta AI, which boasts over 500 million monthly active users. This tool is assisting users in discovering relevant content; more engagement with these services presents increased advertising revenue opportunities.

Moreover, more than 1 million advertisers are leveraging Meta's generative AI tools for ad creation, with many businesses reporting a 7% improvement in conversion rates when using these AI-generated images. This suggests that further investment in AI could significantly benefit both Meta’s growth trajectory and share value.

While heightened AI investments may exert short-term pressure on earnings, Meta’s robust returns on invested capital indicate that these efforts will likely yield more profitable growth in the future. CEO Mark Zuckerberg mentioned on the Q3 earnings call that shareholders could expect to see benefits from these investments in the coming years.

The stock is currently trading at a reasonable forward earnings multiple of 24. At this valuation, investors may anticipate that the stock will perform in line with future earnings growth, potentially leading to a doubling of the share price in the next five years and a performance that exceeds the S&P 500.

Investing, Growth, Stocks