It may come as a surprise to some, but the most profitable way to invest is to buy and hold solid growth stocks over the long term, rather than jumping in and out of the market. Stock prices are notoriously unpredictable in the short term, so frequent trading can result in large losses.
Instead, put your money in well-run, high-quality companies that can grow revenue, earnings, and free cash flow. Over time, as the value of the business increases, the share price should also rise, providing attractive capital gains.
What is business quality?
A business that allows you to increase your wealth should have certain characteristics. It should demonstrate steady growth in revenue over many years and preferably generate consistent free cash flow.
Such companies must also have a robust business model and clear catalysts that can support sustainable growth. The strong overall addressable market growth is also an attractive feature and should reassure investors that the company still has a long growth runway.
With these criteria in mind, here are three attractive growth stocks to own for the long term.
Image source: Getty Images.
fresh works
fresh works (FRSH -3.47%) Deliver customer relationship management and IT service management using artificial intelligence (AI) on a cloud platform. The company counts brands such as: american express, bridgestonewelcomes Phila as a customer.
Freshworks has not only shown consistent growth in revenue over the past three years, but also steadily increased gross profit, as shown below.
| metric | 2021 | 2022 | 2023 |
|---|---|---|---|
| revenue | $371 million | $498 million | $596 million |
| gross profit | $293 million | $402 million | $493 million |
| gross profit margin | 79% | 81% | 83% |
Data source: Freshworks. Fiscal year ended December 31st.
As sales improved, we also generated higher levels of free cash flow. In 2021, it was $2.3 million, which jumped to $77.8 million in 2023.
Freshworks continued to deliver strong financial and operating metrics during the first nine months of 2024. Revenues increased 20.5% year-over-year to $525.8 million, and gross profit increased nearly 23% year-over-year to $442 million. Gross profit margin continued to improve from 82.5% in the previous year to 84.1% in the current fiscal year.
Free cash flow more than doubled year over year, from $49.2 million to $111.6 million. Customers are also spending more, with customers with annual recurring revenue (ARR) over $5,000 increasing by 14.4% year-over-year to 22,359, and customers with ARR over $50,000 increasing by nearly 33% year-over-year. There were 3,008 cases.
The company recently announced Freddy AI Agent, a new generation of autonomous service agents that can be easily deployed in customers' workplaces. According to management, these agents helped resolve an average of 45% of customer support requests and 40% of IT service requests, significantly increasing productivity and efficiency.
Freddy AI Agent can also enhance personalization, helping companies increase customer stickiness to their platforms. During the 2023 Investor Day, management identified an addressable market capitalization of $78 billion, which is a significant runway for the business.
Freshworks intends to continue leveraging AI to create new monetization opportunities and believes the future is bright as the company shows growth in revenue, gross margin, and free cash flow.
Confluence
Confluence (CFLT -3.56%) provides a data streaming platform that helps organizations collate and integrate real-time data from multiple sources to provide analytics and insights. The company is also working on enabling generative artificial intelligence (AI) that avoids hallucinations, or AI-generated responses that contain false or misleading information presented as fact. — Allows for better access control.
As you can see below, Confluent has increased its revenue and gross margin thanks to its cutting-edge software.
| metric | 2021 | 2022 | 2023 |
|---|---|---|---|
| revenue | $388 million | $586 million | $777 million |
| gross profit | $251 million | $384 million | $547 million |
| gross profit margin | 64.6% | 65.5% | 70.4% |
Data source: Confluent. The fiscal year end is December 31st.
Free cash flow has remained negative over the past three years, but there are encouraging signs that as the business scales up, it will eventually generate positive free cash flow.
For the first nine months of 2024, Confluent's revenue increased 24.6% year-over-year to $702.4 million. Gross profit increased 31% year over year to $512.5 million, and gross profit margin continued to improve from 69.4% in the prior year to 73%.
The good news is that operating cash flow was almost positive at negative $1.8 million, compared to the previous year's operating cash flow outflow of $115.9 million. These numbers indicate that the company is on track to generate positive operating cash flow over time.
The total number of customers increased by 16% year-on-year to approximately 5,680, and the number of customers with an ARR of over $1 million increased by 19% year-over-year to 184. As the company grows its total customer base, it also increases customer spending on the platform.
Management has identified a total addressable market of $60 billion in 2022. This market is expected to grow 19% annually to reach $100 billion by 2025, and with annual revenue yet to be achieved, this represents a significant opportunity for Confluent to continue to grow. 1 billion dollars.
Annual subscription revenue soared 66% annually from 2018 to 2023, and the company is expected to maintain this momentum as it is well-positioned to benefit from the organizational shift to cloud computing.
Roku
Roku (Roku -4.59%) is a streaming content provider that helps users find what they want to watch and enjoy. The company also works with content publishers to monetize their audiences and with advertisers looking to reach targeted consumer segments.
As you can see in the table below, Roku has steadily grown its revenue from 2021 to 2023. Gross margins have been under pressure as cost of revenue from the platform segment has risen sharply, but gross margins have nevertheless steadily increased over time.
| metric | 2021 | 2022 | 2023 |
|---|---|---|---|
| revenue | $2.8 billion | $3.1 billion | $3.5 billion |
| gross profit | $1.4 billion | $1.4 billion | 1.5 billion dollars |
| gross profit margin | 51% | 46.1% | 43.7% |
| free cash flow | $173 million | ($150 million) | $188 million |
Data source: Roku. Fiscal year ended December 31st.
The business has generated fairly consistent free cash flow every year, and that continues this year.
In the first nine months of 2024, sales increased 16.5% year-on-year to $2.9 billion, and gross profit increased 19.2% year-on-year to $1.29 billion. Gross margin increased slightly from 43.4% to 44.4%, giving hope that Roku has managed to halt the decline in this metric over the past three years.
Free cash flow for the same period was $136.2 million, making 2022 seem like a flash in the pan as the streaming content provider has generated free cash flow in three of the past four years.
The company's streaming households continue to grow, reaching 85.5 million households in Q3 2024, an increase of 13% year over year. Streaming hours also increased 20% year-over-year to 32 billion hours during the same period.
Roku announced that it reached more than 90 million streaming households by the first week of 2025. This represents an increase of at least 12.5% year over year.
The platform is seeing healthy momentum even as management launched its latest Roku Data Cloud, which allows partners to access, analyze, and use their own TV data. This cloud collaboration platform provides advertisers, agencies, and partners with accurate information and the ability to curate services to their target audience for better results.
The company continues to add streaming services to its platform, the latest being Crunchyroll, a global anime brand that provides access to 25,000 hours of anime across over 2,000 titles.
These efforts and business developments should help Roku continue to grow its subscriber base and sign up more streaming hours, thereby helping the company continue to increase its revenue and free cash flow.
