Some stocks can give you life-changing returns in the long run.
If you had invested $3,500 in Apple(NASDAQ: AAPL) 20 years ago, you'd have a total return of $1.1 million by now. The rise of smartphones worked wonders for the empire Steve Jobs created.
The same $3,500 investment in October 2004 would be worth $1.9 million today if you had picked up some Netflix(NASDAQ: NFLX) stock instead. The serial innovator dominated video stores like Blockbuster into bankruptcy, then switched gears to deliver even richer gains with video-streaming services.
And a $3,500 investment in Nvidia(NASDAQ: NVDA) would work out to a $4.7 million return in 20 years. The designer of graphics processing units (GPUs) and other number-crunching microchips caught fire in November 2022, earnings a 1,050% return in the last two years alone. Wall Street absolutely loves Nvidia's leading role in the market for artificial intelligence (AI) processing hardware.
Why growth investors shouldn't buy those proven winners
Those big gains already happened, though. I can't go back in time and catch them again. This trio of proven millionaire-makers is still rising to new highs, but they probably won't multiply many times over from this lofty plateau. It gets harder and harder to unleash big percentage gains from a massive market cap.
So Netflix, Apple, and Nvidia may be solid stocks if you're looking for stable and robust long-term returns, and I own two of them with that mentality. However, they don't seem likely to deliver game-changing growth again.
Tomorrow's potential millionaire-makers may be small today, but they're staring down a long runway of future growth and innovation. Many of today's top growth stocks will fizzle and fail, but getting in on just one of these early stage opportunities can make you forget about the misses.
On that note, I can't stop buying stock in Roku(NASDAQ: ROKU) and Duolingo(NASDAQ: DUOL). These modest mid-cap stocks have truly wealth-building growth potential. I can't promise millionaire-making returns, but Roku and Duolingo are two of my best bets in this category.
Duolingo's future prospects in the e-learning market
Duolingo is already on a roll. The language-learning expert has posted a 242% stock return in the last two years. Trailing twelve-month sales rose 87% over the same period while free cash flows (FCF) soared 553% higher. In other words, this little company is experiencing high-octane growth today and market makers are paying attention.
So Duolingo's stock isn't cheap. These shares are valued at 55 times FCF and 203 times earnings -- lofty multiples even for a terrific growth stock.
But the company is growing where it matters most. Second-quarter revenues rose 41% year over year and the number of monthly active users increased by 40%. Meanwhile, paid subscriptions saw a 52% jump and FCF soared 60% higher.
In other words, Duolingo is building a launch ramp toward its long-term business goals on a robust foundation of user interest and cash profits. The recent additions of math and music courses indicates that Duolingo aims for a broader e-learning portfolio in the long run. The global online learning market was worth more than $165 billion in 2023 and should grow by more than 50% over the next five years. Duolingo's slice of that massive revenue pie was about 0.3% of the total market last year. The room to grow is quite staggering, and this company is making the most of the opportunity.
So I don't mind paying a premium for Duolingo's stock today. This little company is going places -- fast.
How Roku is redefining the media market
And then there's Roku. The media-streaming technology expert has been around from the start, essentially defining the market for digital set-top boxes when it was the hardware division of Netflix. As a stand-alone business, Roku already dominates the North American streaming platform industry and is now exploring international growth -- much like its former parent company did a decade ago.
This company addresses another epic target market. Media-streaming services are stealing the lunch of cable, satellite, and broadcast media around the world. Movie theaters are losing their iron grip to digital alternatives, and FM radio looks obsolete. Roku doesn't do a lot of hardware sales anymore, having shifted its strategy to software sales and licensing. As long as the digital media market is growing, so will Roku. The lessons learned domestically should pay dividends when applied to other media markets.
Roku's sales are soaring and free cash flows are bouncing back from a visit to the negative side of the street:
ROKU Revenue (TTM) data by YCharts
Market makers are shrugging off Roku's enormous growth prospects and proven cash profits, focusing on its negative after-tax earnings and a struggling digital advertising market instead. As a result, the stock hangs out in Wall Street's bargain basement with a price-to-sales ratio of 3.0. Online advertising can't stay weak forever, and Roku's overseas adventure is just getting started.
This stock is starting from a much more forgiving valuation. Making a modest Roku investment today should reward you with huge long-term returns.
Should you invest $1,000 in Roku right now?
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Anders Bylund has positions in Duolingo, Netflix, Nvidia, and Roku. The Motley Fool has positions in and recommends Apple, Duolingo, Netflix, Nvidia, and Roku. The Motley Fool has a disclosure policy.
