3 Growth Stocks That Could Continue Outperforming the Nasdaq-100

The Nasdaq-100 is the 100 largest nonfinancial companies by market cap in the Nasdaq Composite. Exchange-traded funds (ETFs) like the low-cost Invesco QQQ with $248 billion in net assets have helped make the Nasdaq-100 a mainstream way to invest in a diversified portfolio of growth-focused companies.

The Nasdaq-100 has consistently outperformed the Nasdaq Composite and the S&P 500, largely thanks to the dominance of megacap growth companies and the technology sector. Companies that have outperformed the Nasdaq-100 are in an elite category.

Here’s why three Motley Fool contributors think Alphabet (GOOG 0.66%) (GOOGL 0.49%), Deere & Company (DE -1.40%), and AeroVironment (AVAV 1.71%) could continue outperforming the Nasdaq-100 in the coming years and why all three stocks are worth buying now.

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Alphabet’s growth prospects

Lee Samaha (Alphabet): If the search engine leader is to continue outperforming the Nasdaq-100, it will have to demonstrate that it can keep growing earnings. Fortunately, the company’s recent results indicate it is on track to do just that.

Alphabet’s investment proposition rests on its dominant position in search and online advertising, supported by its fast-growing Google Cloud earnings.

While Alphabet does face some risk from potential antitrust litigation and regulatory actions, its current position is excellent. Management’s cost-cutting helped revenue increase by 16% in the first quarter, translating into a 46% increase in operating income to $25.5 billion.

Google advertising (including search and YouTube) grew 13% to $61.7 billion in the quarter. Google Cloud is now a significant contributor to operating profit, with $900 million in the quarter, up from $191 million in the same quarter a year ago.

All told, Alphabet’s margins are moving in the right direction, its dominant position in search continues to generate double-digit revenue increases, and Google Cloud is set for excellent long-term growth and cash-flow generation. This makes Alphabet a superb choice for investors looking to outperform the technology markets.

Deere’s next growth cycle could be huge

Daniel Foelber (Deere): Deere has produced a 190% total return over the last five years, outperforming the Nasdaq-100’s total return of 153%.

GOOGL total return level data by YCharts.

And while you might not think of Deere as a traditional growth stock, its capital allocation strategy and capital return programs are noticeably more growth-focused than many of its peers. For example, the company spent $7.3 billion on buybacks over the last 12 months compared to $1.5 billion on dividends.

Deere has invested in automation and artificial intelligence for years to help customers increase crop yield, reduce costs, and bridge the gap between precision and predictive agriculture. Predictive analytics leverage big data to forecast challenges before they occur. The goal is centered around increasing profits and encouraging sustainable farming to limit long-term risks associated with damaging farmland and resource depletion.

Over the last three years, Deere’s capital expenditures and research and development expenses have grown faster than its operating expenses, which is a sign that the company is investing in long-term growth.

Fiscal 2023 was a record year for Deere, with the company booking $10.2 billion in net income — shattering the previous record from fiscal 2022 of $7.1 billion.

But in its second-quarter earnings release from May 16, the company guided for full-year net income of just $7 billion — marking a return to fiscal 2022 levels. If Deere hits its guidance, it would still be a massive success because the company never generated over $4 billion in annual net income until fiscal 2021. But growth is slowing, which is normal for cyclical companies.

The challenge for Deere is limiting downside risk during this slowdown, which it is doing through inventory management. But the question long-term investors will want to ask is what will Deere’s next growth cycle look like?

It’s hard to know for certain, but the fiscal 2021 to fiscal 2023 expansion seems to have been largely driven by geopolitical tensions that shook up the global end markets that Deere serves, which led to increased spending by its customers to fulfill pent-up demand. This dynamic gave Deere strong pricing power, and it was able to capitalize with high margins.

I think the next cycle will be more technology-focused than in the past. Deere could shift into a new growth gear once its years of investments begin to pay off. With a 15.7 price-to-earnings ratio based on Deere’s projected fiscal 2024 earnings, the stock isn’t terribly expensive even if earnings continue to decline in fiscal 2025. It’s a stock worth considering for investors interested in a more growth-focused approach to agriculture and construction.

AeroVironment sees blue skies ahead for the remainder of 2024

Scott Levine (AeroVironment): The Nasdaq-100 has provided investors with some impressive returns lately, but its performance hasn’t soared as high as that of AeroVironment. Since the start of 2024, shares of the drone manufacturer have risen 52.9%, while the Nasdaq-100 has climbed 10.4%.

With the company reporting strong third-quarter 2024 financial results (in addition to other tailwinds), it’s quite possible that the stock can continue to outperform the Nasdaq-100, making AeroVironment a name that growth investors should certainly keep on their radars.

Soaring to a new altitude, AeroVironment reported a company-record $187 million in revenue for the third quarter of 2024 — a 40% year-over-year increase — thanks in part to record sales from its business in loitering munitions (also known as suicide drones).

At the bottom of the income statement, the company also excelled. AeroVironment reported adjusted diluted earnings per share (EPS) of $0.63, a 91% increase compared to the same period last year.

In addition to a backlog that’s 12% larger at the end of the third quarter compared to the same time last year, and the company’s strong performance last quarter, management is confident that the company will enjoy considerable growth in 2024 compared to 2023.

Should the company meet the midpoints of its 2024 revenue guidance of $700 million to $710 million and adjusted diluted EPS guidance of $2.69 to $2.83, it will mean a year-over-year increase of about 30% and 119%, respectively.

As a leading manufacturer of drones for militaries around the world and with global conflicts showing little sign of tapering off anytime soon, AeroVironment warrants serious consideration for investors looking to fortify their portfolios with a solid growth stock.