2 Stocks That Could Create Lasting Generational Wealth

Key Points

• Alibaba's ability to drive growth with its AI technology is undervalued by investors right now.

• Toast continues to demonstrate tremendous growth potential with its cloud-based restaurant management platform.

• 10 stocks we like better than Alibaba Group ›

Identifying competitively strong companies that are showing strong growth can point you toward future winners. As long as you keep a long-term mindset, sticking with quality growth stocks over many years can pay off handsomely.

To help you in your search, here are two stocks that appear poised for outstanding returns over the next decade.

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1. Alibaba

Alibaba (NYSE: BABA) is a leading Chinese tech giant, with a strong market presence across e-commerce, cloud computing, and artificial intelligence (AI). The company is starting to show signs of recovery after a sluggish few years due to a weak economy and increasing competition in e-commerce. The shares are up 28% year to date, but still trade at a valuation that may significantly undervalue Alibaba's prospects, especially in AI.

The stock currently trades at just 14 times trailing 12-month earnings. But this looks very modest given the company's 23% year-over-year increase in earnings in the most recent quarter.

Alibaba still has a lot of opportunity in e-commerce. Its Taobao and Tmall marketplaces posted a 12% increase in customer management revenue last quarter. This business generates very high profit margins, since it generates revenue from merchant fees. The AliExpress platform has attractive growth opportunities internationally, where the international digital commerce group posted a revenue increase of 22% year over year.

Alibaba credits investments in AI for driving consumer spending across its online marketplaces. This reflects growing momentum with AI technology in its cloud business, where it has seen triple-digit growth in AI-related services. Overall, its cloud intelligence group posted an 18% year-over-year increase in revenue last quarter.

As a leader in cloud computing, Alibaba is competitively positioned to leverage cutting-edge technologies to benefit its e-commerce business, while also benefiting from growing demand for enterprise cloud services.

Management has been buying back shares, signaling that the stock is undervalued right now. Based on this year's consensus earnings forecast on Wall Street, the stock trades at a cheap forward price-to-earnings multiple of 12. That's a bargain for one of the world's leading tech giants and could lay a foundation for significant outperformance of the market averages over the next decade.

2. Toast

The restaurant industry is adopting more cloud-based management solutions. There are a lot of companies competing for a share of this market, but Toast (NYSE: TOST) is standing out. It has delivered consistent, strong revenue growth in recent years and is well positioned to be an industry leader.

Toast offers a comprehensive point-of-sale system covering payments, ordering, and marketing, and it offers tailored solutions for different markets ranging from pizzerias to hotels. While Toast's premium pricing can be a turnoff for some managers, especially when there are other solid options on the market, customer reviews show it is very user-friendly, which makes it a popular choice for employees.

Thousands of new restaurants are choosing to sign up for Toast every quarter, indicating a competitive advantage. The company added 6,000 net new locations in the first quarter, bringing its total to around 140,000. Recent notable deals included Applebee's and Topgolf.

As a relatively small software-as-a-service business, Toast has historically not reported a profit, as it invests in expansion. But it's starting to turn the corner, with net income improving to $43 million in Q1, reversing the $56 million loss in the year-ago quarter. On a trailing 12-month basis, net income reached $158 million, and this is driving the stock higher.

Toast is expanding rapidly in an industry with more than 14 million employees and contributing around $3.5 trillion to the U.S. economy. With the company's market cap at just $25 billion, it's easy to see Toast's business growing to be worth significantly more in the next few decades.

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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Toast. The Motley Fool recommends Alibaba Group and Topgolf Callaway Brands. The Motley Fool has a disclosure policy.