In a globally synchronized world, there are big opportunities across sectors. This has intensified competition as companies look to grab a share of the pie. It eventually boils down to the survival of the fittest. In the context of corporations, the innovation factor determines the “fittest.” Therefore, this column focuses on innovative growth stocks for future profits.
It goes without saying that the basic screening criteria are to investigate companies with high investment in research and development. I personally like entities where R&D investment translates into a significant upside in cash flows. This provides the company with an additional buffer to accelerate investment in innovation.
In a dynamic world from a technology perspective, I believe that investors should look at these three next-gen profit stocks to buy. Over a period of five years, these stocks are poised to deliver multibagger returns.
Apple (AAPL)
Regarding innovation-driven growth, it’s difficult to challenge Apple (NASDAQ:AAPL). Over the year, the company has surprised investors and consumers with products that have set the highest standards.
It’s interesting to note that AAPL stock has been silently trending higher, with returns of 40% for year-to-date 2023. If we understand the markets’ language, exciting products are in the pipeline. According to speculative news, five new Apple products will be launched in 2023. This includes iPhone 15 and mixed reality headsets.
Other products potentially in the pipeline include Apple cars and foldable iPhones. The important point is that Apple generates well over $100 billion in operating cash flows annually. Therefore, there is ample flexibility to invest heavily in innovation. This includes the acquisition of innovative start-ups.
Apple is already inching toward $3 trillion in market valuation. I would not be surprised if Apple is a $5 trillion company by 2025.
Nvidia (NVDA)
It’s been a remarkable year for Nvidia (NASDAQ:NVDA) stock investors. NVDA stock has skyrocketed by 172% for year-to-date.
Of course, I would wait before taking any fresh exposure to the stock. However, Nvidia is among the innovative growth stocks for future profits. Currently, the company is inching towards a $1 trillion market valuation. I would bet on the company commanding a $3 trillion valuation in the next five years.
For Q1 2024, Nvidia reported 114% growth in the automotive segment on a year-on-year basis to $296 million. The contribution of this segment is small compared to the total revenue. However, the segment will be big in the next five years with AI automotive solutions for EVs and traditional OEMs. It’s worth noting that the NVIDIA DRIVE operating system has received safety certification from TUV SUD.
In the Data Center segment, Nvidia believes that enterprise customers moving to a cloud-first approach will benefit the company. Talking about an innovation-driven approach, Nvidia has 7,500 patents or pending applications globally.
Another major point to note is that the company’s solutions cater to industries that include automotive, healthcare, robotics, gaming, and AI factories. According to Nvidia, the market opportunity is $1 trillion.
Merck (MRK)
At the beginning of 2020, Moderna’s (NASDAQ:MRNA) stock was trading below $20. MRNA stock surged to highs of $485 in August 2021. Developing the vaccine against covid-19 was a game changer for the pharmaceutical company. However, it was well before 2020 that Moderna invested in mRNA vaccine research. I believe that investors should hold a pharmaceutical stock with heavy investment in R&D.
One company that looks attractive is Merck (NYSE:MRK). From a valuation perspective, MRK stock looks attractive at a forward price-earnings ratio of 15.9. The stock also offers a dividend yield of 2.63%.
From the research perspective, Merck invested $13.5 billion in R&D in 2022. The company has 30 programs in phase three and 80 in phase two of trials. As new drugs are commercialized, there is visibility for growth and cash flow upside.
In April, Merck closed the acquisition of Prometheus Biosciences (NASDAQ:RXDX) for an equity consideration of $10.8 billion. The acquisition boosts the company’s pipeline in the immunology segment.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
