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Was 2023 a good year for growth stocks?
At first glance, the answer seems obvious: an undeniable “yes.”
Tech giants like Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) have ridden a surge in cloud computing demand this year. Nvidia (NASDAQ:NVDA) is now a trillion-dollar company. And even the crackdowns at Netflix (NASDAQ:NFLX) on password sharing haven’t stopped shares advancing 60% so far this year.
But these mega-cap tech stocks — all members of the so-called Magnificent Seven — aren’t a particularly good representation of growth stocks… or even markets in general.
As a recent Economist piece notes, these seven firms only make up a quarter of the U.S. stock market. The piece goes on to report: “And the remaining 98.6% of companies, it turns out, are not well characterised by seven tech prodigies that have moved fast, broken things and conquered the world in a matter of decades.”
In reality, 2023 has been a relatively muted year for most growth stocks. Without the Magnificent Seven, the S&P 500 Growth ETF (NYSE:IVW) has underperformed is value counterpart by 6%.
That means growth stocks are broadly cheaper than they were at the start of the year. The average price-to-earnings (P/E) ratio of companies in the S&P 500 Growth index has fallen from 42.9 times to 34.2. Price-to-sales (P/S) ratios have dipped roughly 7%.
However, investors will need to stay selective for 2024. The average earnings estimate growth rate for S&P 500 Growth firms has fallen from 27.3% in 2022 to 17.7%. And some AI chip firms, like Advanced Micro Devices (NASDAQ:AMD), are even expected to see profits shrink next year on tough comps.
This week, the writers at InvestorPlace.com, our free news site, have jumped into analyzing tech stocks in order to separate the 2024 winners from the losers. Here’s what they’ve found.
5 Growth Stocks to Buy for 2024: AstraZeneca (AZN)
Growth investors often overlook major pharma firms. These healthcare giants are constantly facing patent cliffs for their blockbuster drugs, which means growth spurts are usually followed by eventual declines. Pfizer (NYSE:PFE) saw its revenues shrink 32% between 2010 and 2020 after blockbusters like Lipitor went generic.
However, some firms like AstraZeneca (NASDAQ:AZN) have managed to create robust drug pipelines that almost guarantee growth. Analysts expect the firm to notch 14% earnings per share ( ) growth over the next three years, driven by cancer drugs like Tagrisso, Imfinzi and others.
It’s why Faisal Humayun chooses AstraZeneca as his only healthcare pick to potentially become the next trillion-dollar company in an InvestorPlace.com article this week.
“Coming to AstraZeneca, the Company has a deep pipeline of 172 projects. The pipeline of new molecular entities is for conditions that include oncology, respiratory, immunology, cardiovascular, and rare diseases, among others. A strong pipeline provides growth visibility for the coming years.
“It’s worth noting that the Company has 30 potential Phase Three trials for the year. Of this, there are ten potential blockbuster opportunities. I would, therefore, remain bullish on healthy growth in the next few years.”
Shares trade for a reasonable 17 times earnings — a premium to slower-growing pharma companies, but well under valuations of high-growth biotechs. Markets know that AstraZeneca is a higher-growth play, and shares seem to be worth it.
2. Li Auto (LI)
In the early 2020s, predicting the winners of the Chinese electric vehicle race was tricky at best. We knew the market wasn’t big enough for the dozens of contenders to all succeed, but it wasn’t clear which ones would survive.
Today, the winners are beginning to make themselves known. And Li Auto (NASDAQ:LI) is one of the top contenders.
This week, Vandita Jadeja observes at InvestorPlace.com how Li Auto has outperformed its peers by a wide margin. Deliveries are up almost 300% year-over-year, and the company has managed to sell products as quickly as they can be produced. Inventories are down 16% since the start of the year. That stands in sharp contrast to companies such as Nio (NYSE:NIO), which has seen deliveries shrink and unsold inventories rise over the past several quarters.
That’s because Li Auto wisely decided early on to compete in the SUV segment, a faster-growing and less competitive market than sedans in China. Forty-six percent of all passenger vehicle sales in the country are now SUVs, and the share continues to grow. Meanwhile, firms like Nio fight in a far more saturated market.
That’s given Li Auto an advantage. Rising sales in the auto industry tend to be self-reinforcing, because servicing and parts become cheaper and more accessible. So even though sedan competitors will undoubtedly launch more SUVs for the Chinese market, Li Auto’s strong momentum and popular products could help the firm reach new heights in 2024.
3. Qualcomm (QCOM)
2023 was a rough year for Qualcomm (NASDAQ:QCOM). The smartphone chipmaker saw rising competition from Huawei and Samsung, regulatory crackdowns, and declining demand for handsets. Revenues fell 19% from the previous year.
But 2024 is shaping up to become a return to growth for this Silicon Valley firm. Analysts expect net income to recover 10% to $10.4 billion, and for the figure to hit $12.4 billion by 2026.
At the heart of this growth is 5G buildout, which benefits Qualcomm. The company has a near-monopoly on 3G CDMA technology, and backward-compatibility issues mean these royalties extend into 5G as well. The company collects between 2.275% to 3.25% of all smartphone sales.
It’s why InvestorPlace.com’s Josh Enomoto calls Qualcomm a company that could eventually join AstraZeneca in becoming a trillion-dollar firm:
“Qualcomm is heavily involved in 5G. According to Bloomberg, the 5G infrastructure market could grow by nearly $96 billion from 2023 to 2030. In addition, the company also engages the broader space economy with its satellite platforms. Per McKinsey & Company, the space economy could hit $1 trillion by the start of the next decade…
“By picking pieces here and there, yes, it could eventually be one of the trillion-dollar companies.”
He also notes that Qualcomm trades at only 13 times forward earnings. What’s not to like?
4. SoFi (SOFI)
Louis Navellier and his staff reminds us this week at InvestorPlace.com that the future of any disruptive startup business is always uncertain. Startup business models are often untested, and success can come down to luck.
Online banking firm SoFi Technologies (NASDAQ:SOFI) fits on that list. The San Francisco-based lender gambled that lending money to college graduates would eventually pay off. Even if these twenty-somethings had no credit score, surely future earnings would help them repay debts?
The bet is paying off. In the most recent quarter, SoFi announced $98 million in adjusted EBITDA, a 120% increase from the prior year. These figures were driven by relatively low default rates and a surge in cross-selling financial services. This includes checking accounts, credit cards and personal financial management. It’s why Navellier and his staff believes it’s not an exaggeration to say that SoFi poses an actual threat to traditional banks.
Analysts expect revenues to rise 33% this year and for the company to hit breakeven net profits by 2024. SoFi is a growth company, no matter how you look.
And perhaps the best part? A 40% share-price decline since July means that the stock now trades at 0.8 times book value. Growth doesn’t get much cheaper than this.
5. Meta Platforms (META)
Between 2019 and 2020, shares of Facebook parent Meta Platforms (NASDAQ:META) doubled in price as the presidential election got underway. Analysts estimate that Facebook takes roughly a fifth of all digital ad spending in the United States, so a surge in political advertising will benefit the company.
Fast forward four years, and we’re seeing the same pattern emerge. Media companies are seeing an uptick in ad spending ahead of the 2024 election, and ad-tracking firm AdImpact now expects $10.2 billion to get spent this cycle, a 13% increase from 2019-’20.
Of course, I should point out that Meta is one of the Magnificent Seven stocks. That means it’s seen its valuations surge from 11 times trailing earnings to 28 times. Eric Fry, however, rightly notes this week that Facebook’s shares should still rise even further in 2024.
“The firm’s aggressive cost-cutting measures and improving ad business were already showing positive results. And soft inflation figures from last month set the stage for a summer stock surge. Facebook is historically more sensitive than its peers to market cycles.
“That means a recovery could happen faster than expected. [Free cash flow] is now expected to recover to $23 billion this year and hit the ‘magic’ $30 billion level in 2024. Heavy advertising spending from the 2024 presidential election means these figures will likely play out this time around.”
Because Meta’s 2024 earnings are expected to grow so quickly, its forward P/E ratio sits at only 19 times. And for a Magnificent Seven stock, that’s great value indeed.
Shaking Out the Weaker Growth
2024 will be a particularly painful shakeout year for lower-quality growth firms. Many startups that raised cheap capital during the 2020-2022 bonanza are running out of cash, so we’re going to see more bankruptcies like WeWork (NASDAQ:WE). Refinancing existing debts will also become more expensive, as indebted firms will soon realize. Some firms could see their interest payments double or more.
It’s why some early-stage growth firms like Lucid Group (NASDAQ:LCID) have bent over backward to appease their financiers, going as far as building factories in regions where it doesn’t make sense.
But well-funded firms with a history of success will do well. As Luke Lango outlines in his most recent video presentation. In that presentation, Luke tells us all about Elon Musk’s Project Dojo… a secretive brand-new project that could transform the world… disrupt Silicon Valley… and potentially build the most valuable company America has ever seen.
I’ll see you back here next Sunday. In the meantime, have a wonderful Thanksgiving holiday.
On the date of publication, Tom Yeung held a LONG position in GOOGL stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.