It's practically impossible to predict short-term fluctuations in the stock market. In fact, after the 33% plunge in the Nasdaq-100 technology index in 2022, few professional Wall Street analysts believed it would then go on to surge a whopping 40% in the first six months of this year.
That's why taking a long-term approach is the best way to generate strong returns. It smooths out short-term volatility, and history proves the more time you spend invested in the market, the higher the probability you'll make money. The Nasdaq-100, for example, has delivered a positive annual return 80% of the time since 1986.
Investors can track that performance by purchasing an index fund, which is a conservative -- or " passive " -- way to gain exposure to the market. On the other hand, investors with a higher appetite for risk might choose to pick individual stocks due to the potential for much higher returns (but also greater risk).
I'm going to share two stocks below that are growing their businesses fast enough to potentially turn a $200,000 investment into $1 million over the next 10 years. But don't be deterred by those large numbers -- investors of any experience level can buy these stocks today.
Image source: Tesla.
1. Tesla: Autonomous driving could be its biggest financial opportunity, ever
Tesla (NASDAQ: TSLA) is one of the fastest-growing companies in history. It generated $413 million in revenue during 2012, and a decade later in 2022, that figure had surged 19,615% to over $81 billion. That's a compound annual growth rate of 69.6%!
Electric vehicle (EV) sales are Tesla's bread and butter. It's the largest manufacturer of EVs in the world, and it expects to build 1.8 million cars this year alone. CEO Elon Musk has his sights set on the long term, though, estimating the company will be producing 20 million cars per year by 2030, from as many as 12 gigafactories spread across the globe.
But believe it or not, that probably isn't Tesla's biggest financial opportunity. The company is a leading developer of fully autonomous self-driving software, and customers have already clocked 150 million miles driven using the technology in the real world in beta mode. Musk thinks it could be ready for a wider public release later this year, which could turn its entire fleet of customer vehicles into autonomous robotaxis.
Musk says the average passenger car only spends about 12 hours per week on the road. By installing self-driving software, each Tesla customer could lend their vehicle to an autonomous ride-hailing network while they're not using it, earning revenue that would be split between them and the company. That could increase the gross profit margin from the production of each Tesla from 25% today to over 70% in the long run, adding billions of dollars to the company's bottom line.
Musk's expectations for this new industry are supported by bullish tech investor Cathie Wood . Her firm, Ark Investment Management, thinks the robotaxi business could catapult Tesla to a valuation of $6.1 trillion by 2027 -- or seven times what it's worth today .
Based on Tesla's $86 billion in trailing-12-month revenue and its current market capitalization of $820 billion, its stock trades at a price-to-sales (P/S) ratio of 9.5. Assuming that remains constant between now and 2033, Tesla will have to grow its revenue by 17.5% each year to justify a fivefold return in its stock price.
Considering its track record over the last 10 years and its future opportunities, all signs suggest it will blow that growth rate out of the water , allowing its valuation to cool down too. As a result, Tesla stock is a great candidate to turn a $200,000 investment into $1 million.
2. Lemonade: Disrupting an age-old industry
Dealing with your insurance company is never pleasant, particularly when it comes to making a claim. The process can involve several phone calls and a long wait between the incident and the final payout. Lemonade (NYSE: LMND) burst onto the scene in 2016 armed with artificial intelligence (AI) and an ambitious goal to change the industry, and it has an expanding product portfolio that already includes renters' insurance, homeowners' insurance, life insurance, pet insurance, and car insurance.
Disrupting such an enormous industry makes for a volatile journey. Lemonade's stock price is down 90% from its all-time high as investors have shunned unprofitable companies over the last couple of years amid tough economic conditions, so recovering even half of that ground would almost be enough for a fivefold gain! But Lemonade has even more potential in the long run.
The company uses AI to interact with customers -- its chatbots can write insurance quotes in 90 seconds and pay claims in under three minutes without human intervention. Plus, Lemonade continues to release more advanced models behind the scenes to help price premiums more accurately and target the most lucrative products and geographic markets to maximize its revenue.
Speaking of which, Lemonade generated just $67 million of revenue in 2019, but it grew at a compound annual rate of 56% to top $256 million in 2022. That isn't much of a track record given the company is still so young, but it's a much faster growth rate (so far) than the 17.5% annual rate of return it needs to send its stock surging fivefold between now and 2033.
Plus, there are signs Lemonade's growth is actually accelerating . In the first quarter of 2023, revenue surged 115% year over year, which was significantly above trend. Plus, the company expects a similar result in the current quarter.
The market for car insurance in the U.S. alone was worth $327 billion last year. Considering Lemonade's total in-force premium is just $653 million across all products right now, it has an enormous runway for growth, and it shouldn't be surprising that its revenue increases at a faster rate as the company scales.
Lemonade stock is a riskier play than Tesla simply because its business is at an earlier stage. But it certainly has the potential to help turn $200,000 into $1 million over the next decade based on the evidence at hand right now.
Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lemonade and Tesla. The Motley Fool has a disclosure policy .
