Investing in quality growth stocks can help you generate outsized gains in the upcoming decade. Over the years, big tech giants such as Apple, Microsoft, Amazon, Alphabet, and Nvidia have delivered market-thumping returns to long-term shareholders.
Canadians looking to gain exposure to such companies should consider holding the investments in a Tax-Free Savings Account (TFSA), as any returns generated in the registered account are exempt from Canada Revenue Agency taxes.
While the maximum TFSA cumulative contribution room has increased to $95,000 in 2024, you can allocate $25,000 in fundamentally strong tech stocks and grow the investment to $250,000 over time.
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ServiceNow stock
Valued at US$182 billion by market cap, ServiceNow (NYSE:NOW) has already returned 1,350% to shareholders in the last 10 years. The company provides enterprise cloud computing solutions that manage and automate services for enterprises globally. It operates the Now platform for workflow automation, artificial intelligence, machine learning, robotic process automation, performance analytics, configuration management systems, data benchmarking, and collaboration tools.
ServiceNow’s sales have increased from US$3.46 billion in 2019 to US$9.95 billion in the last 12 months, and its operating income has risen from US$42 million to US$1.07 billion in this period. Due to its asset-light model, the large-cap tech stock is positioned to benefit from high operating leverage and should grow its earnings at a much higher rate than revenue.
Notably, its free cash flow has risen to US$3.46 billion in the last 12 months, up from US$971 million in 2019. A free cash flow margin of over 35% allows the SaaS (software-as-a-service) giant to reinvest in organic growth and target accretive acquisitions.
Despite its massive size, ServiceNow’s growth story is far from over. In the June quarter, its subscription sales increased by 23%, while its remaining performance obligations were up 22%. The number of customers spending more than US$1 million on the ServiceNow platform also rose by 15%.
Additionally, ServiceNow offers a generative artificial intelligence product called the Now Assist, which is the fastest-growing product in the company’s history.
Axon Enterprise stock
Valued at US$29 billion by market cap, Axon Enterprise (NASDAQ:AXON) develops, manufactures, and sells conducted energy devices under the Taser brand. It also offers hardware and cloud-based software solutions that enable law enforcement agencies to capture, securely store, manage, share, and analyze video and other digital evidence.
Axon has more than doubled its sales from US$531 million in 2019 to US$1.8 billion in the last 12 months. While it reported an operating loss of US$4.4 million in 2019, its operating income totalled US$153.8 million in the last year. Moreover, the company’s free cash flow has more than doubled from US$75 million in 2021 to US$204.3 million in the last four quarters.
In the June quarter, Axon Enterprise grew sales by 35% year over year due to a 47% rise in cloud sales and a 28% increase in Taser revenue. In fact, the second quarter (Q2) was the first time when cloud sales at US$195 million matched hardware sales at US$197 million. It ended Q2 with future contracted revenue of US$7.3 billion, up from US$5.2 billion in the year-ago period.
Wall Street expects its adjusted earnings to expand from US$4.14 per share in 2023 to US$5.91 per share in 2025. So, AXON might seem expensive at 64.8 times forward earnings, but growth stocks tend to trade at a premium.
The Foolish takeaway
The two tech stocks discussed here are part of the U.S. market, which is the largest economy in the world. Canadians should consider identifying other such quality companies and further diversifying their TFSA portfolio.
