Small Investments, Big Potential: 3 Stocks Poised for Long-Term Growth

Warren Buffett once said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

What Buffett meant is that while a stock's current valuation is important, when looking out five to 10 years or more, quality companies with strong earnings growth prospects tend to outperform over the long-term.

That's why young investors should invest in growth stocks with leadership positions and large addressable growth opportunities, bought at reasonable valuations -- and why the following three stocks should be on long-term investors' buy lists today.

Amazon

Some may scoff at Amazon (NASDAQ: AMZN) possibly being an outperformer from here. After all, its market cap is $2.7 trillion, and Amazon is poised to become the largest company in the world in terms of revenue this year.

But in contrast to most of its large-cap Magnificent Seven peers, Amazon doesn't return cash to shareholders, instead opting to reinvest in its businesses, grow entirely new ones, and experiment with revolutionary ideas.

That's how Amazon upended the retail market, invented the cloud computing market, and how it's still growing at double-digit rates despite its huge size. But not only is Amazon growing double-digits, last quarter showed a growth acceleration across its online stores, digital advertising, and cloud computing businesses.

Amazon piggy-backed on its impressive third quarter earnings report by announcing a deal with AI leader OpenAI this week. It's a $38 billion deal for AWS, but with the potential to be expanded over seven years, expanding the recent availability of OpenAI's models on Amazon Bedrock. The deal is notable especially since Amazon is heavily invested in OpenAI's rival Anthropic. So, the fact that OpenAI agreed to use AWS for any of its distribution or training goes to show the competitiveness of Amazon's market-leading cloud platform.

Beyond the very exciting recent AI and cloud news, Amazon is also launching an entirely new business at the end of this year in Project Kuiper, its satellite-based broadband offering.

E-commerce is still projected to grow at double-digits for some time going forward, as it's still a minority of overall global retail, which is a massive $32 trillion market. Meanwhile, cloud computing is also taking increasing share of overall IT spend, fueled by the hypergrowth of AI computing. Look for Amazon to continue capitalizing on these trends and finding new ones, as its philosophy of constant reinvestment in growth is unique among large-cap stocks.

Vita Coco

While the AI-fueled technology sector has crowned many big winners, certain consumer brands can also have multibagger potential.

Beverages are a daily habit, and consumers tend to stick with brands they like and trust. That has minted long-term winners in the space, including Warren Buffett's terrific bet on Coca-Cola in the latter part of the 20^th century, and more recent winners such as energy drink brands Monster Beverage and Celsius Holdings.

One contender for the next big winning beverage brand is Vita Coco (NASDAQ: COCO). With a market cap of just $2.3 billion, Vita Coco nevertheless leads the coconut water category by a wide margin, garnering about 42% of the U.S. market and even greater market share in Europe.

Despite that dominant market share, which is a testament to Vita Coco's first-mover advantage, the company still grew revenue 37% last quarter, but even faster at 42% for its core Vita Coco brand, as the company also sells some coconut water to private label partners.

Image source: Getty Images.

That's a testament to the growth of the coconut water category, which founder and Chairman Michael Kirban said on the conference call with analysts is, "in the very early stages of gaining mainstream appeal on a global level. Coconut water looks to be transitioning from niche to mainstream, and we are at the forefront of that trend." Kirban went on to note that the coconut water category has grown 22% year-to-date in the U.S., 32% in the U.K., and over 100% in Germany, which are Vita Coco's top markets.

Tariffs are currently eating into the company's margins at the moment, but Vita Coco has been able to take some price increases to compensate. Still, if the coconut water category moves from niche to mainstream, that kind of explosive growth will overwhelm any near-term margin compression. Even at today's high-looking valuation around 35 times earnings, long-term investors may want to bet on this better-for-you brand becoming much bigger in the years ahead.

On Semiconductor

One semiconductor stock with promising long-term growth prospects, but which currently trades at a cheap valuation, is On Semiconductor (NASDAQ: ON).

On makes power chips and sensing chips, and has traditionally focused on the electric vehicle and electric infrastructure markets, among others. However, with the extreme power requirements of AI data centers, data center operators are turning to companies that make highly power-efficient chips to handle the massive electricity loads.

This means switching from traditional silicon IGBTs to compound semiconductors, such as gallium nitride (GaN) and silicon carbide (SiC), which have traditionally only been used in rugged applications like electric vehicles or high-voltage energy infrastructure. Of note, On Semi has a strong 35% to 40% share in silicon carbide chips.

On its recent earnings release, On management divulged its new data center segment will grow to reach $250 million this year, which would be more than double last year's total. While that would only account for about 4% of On's current revenue, look for this segment to become more consequential in the years ahead. Management noted a partnership with Nvidia to help bring on the new 800-volt DC power architecture that will be required by Nvidia's next-generation chips.

Despite the strong prospects for On's power chips in AI data centers, revenue and profits are currently down relative to last year, due to the long bear market in EVs and industrial chips following the post-pandemic boom. Still, those markets appear to have bottomed, with all of On's segments displaying quarter-over-quarter growth in the mid-single digits in Q3.

Meanwhile, shares trade at just 22 times this year's earnings estimates, which is actually fairly cheap if earnings are at a cyclical bottom. Thus, it's not hard to anticipate much better times ahead, if and when the EV and electric power markets recover, just as demand for AI data center power chips accelerates.

Billy Duberstein and/or his clients have positions in Amazon, ON Semiconductor, and Vita Coco. The Motley Fool has positions in and recommends Amazon, Celsius, and Nvidia. The Motley Fool recommends ON Semiconductor. The Motley Fool has a disclosure policy.