Despite the recent sell-off, the S&P 500 is still up 18% over the past year, outpacing its own long-term average of 8% annualized growth. Even so, some Wall Street analysts see plenty of upside left in the market, particularly when it comes to growth stocks, many of which have fallen sharply over the last few months.
For instance, Ark Invest currently has a price target of $3,000 on Tesla (TSLA 4.96%), implying 225% upside by 2025. And Credit Suisse raised its price target on Snap (SNAP) to $93 after a strong fourth quarter, implying 140% upside in the next 12 months. Given the potential gains, is it time to add these growth stocks to your portfolio?
Let's take a closer look.
Image source: Tesla
1. Tesla
Semiconductor shortages weighed on the auto industry in 2021, but Tesla turned in another impressive performance. For the fourth consecutive year, it ranked as the world's leading electric vehicle (EV) brand, holding 14.4% market share. And the company grew its deliveries by 87%, outpacing all other high-volume manufacturers for the thirteenth consecutive quarter.
Perhaps more important, Tesla's efforts to make manufacturing more efficient -- boosting production in California and China, single-piece casting for the Model Y -- are paying off. In the third quarter, the company posted an industry-leading operating margin of 14.6%, and that figure ticked up to 14.7% in the fourth quarter. Additionally, the cost of goods per vehicle dropped to $36,000 in the fourth quarter, down from $38,000 in the first quarter and $84,000 in 2017.
For the full year, Tesla's revenue skyrocketed 71% to $53.8 billion, and the company posted a GAAP profit of $2.05 per diluted share -- in fact, the company has now achieved GAAP profitability for the last 10 consecutive quarters. And free cash flow jumped 49% to $2.8 billion. More importantly, the future looks bright for Tesla, as the company believes it can grow EV deliveries at least 50% per year over a multi-year horizon. And output should improve in 2022 as the new Gigafactories in Berlin and Texas start producing vehicles.
Perhaps more exciting, CEO Elon Musk noted that Tesla's full self-driving software would eventually be its greatest source of profitability, and he also said the company would "achieve full self-driving this year." If that does indeed come to pass, Tesla would able to launch an autonomous ride-sharing platform, pioneering a market that ARK Invest values at $1.2 trillion by 2030.
Also noteworthy, Musk said Tesla's AI-powered humanoid robot (Optimus) may enter production in 2023 -- along with the Cybertruck and Semi -- and that Optimus could eventually be bigger than Tesla's automotive business.
So could Tesla reach $3,000 per share by 2025? Well, that would put its market cap at $3 trillion, which is no small task. But if Tesla continues to execute on EV production, while also delivering on its promise of an autonomous ride-sharing service, I think it could hit that price target. But even if that doesn't happen, Tesla still looks like a good stock to hold for the long term.
Image source: Getty Images.
2. Snap
Snap is a camera company that specializes in augmented reality (AR) and artificial intelligence (AI). Its core product is Snapchat, a social platform designed for visual communication. Specifically, people can personalize photos and videos with AR lenses -- tools that add 3D objects and special effects -- then share that content with friends, families, and the broader Snapchat community.
Snap's camera also supports scanning, a feature that leans on AI to understand what the camera sees in the viewfinder. For instance, you can scan a car to learn more about the make and model, or you could scan a household product to purchase it on Amazon's marketplace. In short, Snap uses AR and AI to create an engaging social experience, and that strategy has made the mobile app particularly popular with younger generations.
In fact, 75% of 13-to-34-year-olds in the United States use Snapchat, and the same is true in geographies like the United Kingdom, France, and Australia. That demographic is particularly valuable to advertisers, as it gives them a chance to build long-lasting customer relationships. To that end, Snap monetizes its business by helping brands build, measure, and optimize targeted ad campaigns.
For the full year, the company delivered impressive financial results. Revenue soared 64% to $4.1 billion, and while Snap is still unprofitable on a GAAP basis, the loss narrowed to $488 million in 2021. Better yet, the company posted free cash flow of $223 million, marking the first time Snap has generated positive free cash flow on a full-year basis.
So could Snap hit $93 per share in the next 12 months? It's certainly possible, assuming the company continues to execute and Wall Street reacquires its taste for richly valued growth stocks. But even if that doesn't happen, I think this stock looks like a smart long-term investment, as it taps into high-growth industries like digital advertising and the metaverse.
