If you are an individual investor, it can be helpful to check what sentiment is from the big dogs on Wall Street from time to time. Luckily, tons of Wall Street analysts post their research publicly, giving out their buy or sell ratings for anyone to take a look at. Websites aggregate these recommendations so people can easily find what these professionals think about a stock at any moment. While not the end-all-be-all, these recommendations can help you easily get up to speed to see how investors feel about a stock you are looking at.
Right now, Wall Street loves the three growth stocks we will discuss below. Let's see if they belong in your portfolio.
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1. Tesla: The leader in electric vehicles
Tesla ( TSLA -5.12% ) is the largest pure-play electric vehicle (EV) manufacturer worldwide. The company has grown quickly in the past few years, delivering 936,000 vehicles in 2021, compared to under 250,000 in 2018. This has led to strong growth in revenue and profits, with 2021 net income coming in at $5.5 billion.
The consensus among industry experts is that EVs will continue to gain automotive market share, with estimates for 29% global market share by 2025. This rising tide should help Tesla's business as well. However, I think there is trouble ahead for Tesla investors. Why? Because of the stock's ridiculously high valuation. With a market cap of $850 billion, Tesla stock has a price-to-earnings ratio (P/E) of 155, or more than 10 times the automotive industry average, which is usually closer to a P/E of 10. Can Tesla increase its annual income by a factor of 10 as well? Maybe. But investors need to understand that this level of growth is already priced into the stock.
Wall Street analysts are generally favorable to Tesla stock, with 18 buy and seven sell ratings right now. Tesla has clearly put up some impressive growth numbers over the past decade. But given its nosebleed valuation, high capital intensity, and hypercompetitive market environment, now does not seem like the best time to buy the stock unless you are comfortable with taking on a lot of risk.
2. Nvidia: Powering the next era of computing
Nvidia ( NVDA -2.46% ) is a leading fabless semiconductor company. What does this mean? Instead of following the legacy integrated model, employed by companies like Intel, Nvidia outsources much of the manufacturing part of the process to semiconductor foundries like Taiwan Semiconductor Manufacturing (TSMC), and instead focuses solely on the hardware/software chip design process.
This focused model enables Nvidia to have much higher margins and allows it to advance its chipmaking technology by outsourcing the actual building process to the largest and most technologically advanced manufacturing company in the world, TSMC. In the fourth quarter of fiscal year 2022, Nvidia had 65% gross margins and 39% operating margins. This would not be possible if it manufactured its chips on its own.
Nvidia is riding multiple tailwinds in the computing industry, including the growth of data centers, artificial intelligence, gaming, and cryptocurrencies. Its computer chips power all of these industries. Given these long-term growth drivers, Wall Street analysts are very bullish on the stock, with 30 buy ratings and only one sell rating. The stock does trade at an expensive price-to-operating-income ratio (P/OI) of 55, so an investment doesn't come without risk. But if you believe Nvidia can continue growing its business at a high double-digit percentage rate, now could be a good time to join the Street with an investment in Nvidia.
3. Apple: Beloved brand and dominant market position
Everyone reading this will likely already know Apple ( AAPL -2.39% ), a leading smartphone maker and the inventor of the iconic iPhone product line. On top of smartphones, which are around half of Apple's revenue, it makes Mac computers, the Apple smartwatch, Airpods, and iPads, it has a growing software services business, and it is branching out into the sectors like fintech and streaming services.
Last fiscal year, Apple generated $366 billion in revenue and $93 billion in free cash flow. Revenue grew 33% year over year in fiscal year 2021 and free cash flow grew 27%, which shows that Apple has still been able to grow its business even as its company valuation gets to an unfathomable scale. With a current market cap of $2.5 trillion, Apple trades at a trailing price-to-free cash flow (P/FCF) of 27, or right around the market average.
Wall Street is extremely bullish on Apple stock, with 28 buy ratings and no sell ratings. If you believe consumers around the world will continue to value Apple's product lineup and its various services' potential, now could be a fine time to take a position in one of the largest businesses in the world.
