The Nasdaq Composite fell 9% during the first quarter of the year, but that didn't stop professional money managers from piling into growth stocks. Josh Resnick of Jericho Capital Asset Management started a position in Tesla (TSLA -5.59%), immediately making it the second-largest position in his portfolio. Similarly, Alex Sacerdote of Whale Rock Capital Management bought 2.2 million shares of Arista Networks (ANET -2.96%), making it the sixth-largest position in his portfolio.
Notably, Whale Rock Capital Management and Jericho Capital Asset Management rank as two of the best-performing hedge funds over the past three years. Given Resnick's and Sacerdote's success, is it worth investing in Tesla and Arista Networks today?
Let's dive in.
Tesla: Robo-taxis and autonomous robots
In the first quarter, Tesla captured an industry-leading 15.5% market share in electric-car sales, narrowly beating Chinese automaker BYD. Despite supply chain challenges and high inflation, Tesla managed to produce 305,400 vehicles, up 69% year over year, which sent revenue soaring 81% to $18.8 billion. And the company posted an industry-leading operating margin of 19.2%, up from 14.7% in the prior quarter.
Several factors are powering that efficiency, including greater production volume, pricing power, and a significant cost advantage in battery cell production. As a result, earnings rocketed 633% to $2.86 per diluted share, as Tesla posted its 11th consecutive quarter of profitability on a GAAP (generally accepted accounting principles) basis.
Management expects deliveries to grow at 50% per year over a multiyear horizon, and Tesla should benefit from several catalysts. The company will soon enter new verticals of the automotive industry, as its Cybertruck and Semi are set to launch next year.
Also, production is ramping up at new factories in Texas and Germany. In the long run, that should boost operational efficiency by increasing production capacity and localizing the European business, despite putting short-term pressure on margins.
The Tesla Cybertruck. Image source: Tesla.
Let's not ignore the elephant in the room: Tesla's market cap currently sits at $721 billion, meaning the company is worth more than the next seven automakers combined. By any traditional metric, the stock appears wildly overvalued. So why did Jericho take such a large stake in Tesla? It could have something to do with its potential expansion into more-profitable end markets.
CEO Elon Musk says full self-driving (FSD) will ultimately be the most important source of profitability for Tesla's vehicle business. With that in mind, the company has a robo-taxi slated for volume production by 2024, and it plans to launch an autonomous ride-hailing service at some point thereafter, entering a market that ARK Invest believes could generate $2 trillion in annual profits by 2030.
Delving even deeper into science fiction, Musk believes Optimus -- an autonomous humanoid robot that might enter production as early as next year -- will eventually be worth more than the car business.
Here's the bottom line: The investment thesis for this stock is tenuous right now, and given its valuation, shares could fall much further than they already have. That being said, I am a Tesla shareholder and I have no plans to sell. If you understand the risks, I think now is a good time to buy a few shares of this growth stock.
Arista Networks: The technology that powers the cloud
Arista provides the high-performance networking solutions that power cloud, hyperscale, and enterprise data centers. Its portfolio also includes adjacent software for network workflow management, monitoring, and security. The company's networking products have earned a reputation for industry-leading speed and power efficiency, and its technology plays a prominent role in the data centers of tech titans like Microsoft and Meta Platforms.
According to management, Arista has disrupted the market with two significant innovations. First, its Extensible Operating System runs across its entire lineup of switching and routing hardware, simplifying network management. That single-software-product approach distinguishes the company from legacy vendors like Cisco Systems that complicate network management with multiple different operating systems.
Second, Arista exclusively buys chips from third parties like Broadcom, rather than designing its own. In doing so, the company can equip its hardware with the latest silicon while still focusing research and development spending on software innovation. Moreover, its approach affords clients greater flexibility because they can select which semiconductors are included in their switching platforms. By comparison, legacy vendors often use custom-built chips that result in vendor lock-in, meaning clients have no flexibility and they often pay more.
Fueled by those innovations, Arista has delivered impressive financial results on a consistent basis. Revenue soared 28% to $3.2 billion over the past year, and free cash flow climbed 16% to $904 million. More importantly, the company has gained significant market share at Cisco's expense over the last decade, and shareholders have good reason to believe that trend will continue.
Arista is the clear leader at the high-speed end of the switching spectrum, and those high-speed platforms will only become more necessary in the future. The continued adoption of cloud computing, the explosion of data-intensive applications (such as artificial intelligence), and the growing number of connected devices will all drive a need for faster data center networks. Arista puts its market opportunity at $35 billion by 2025.
From that perspective, Sacerdote's decision to invest makes a lot of sense. This growth stock still looks like a smart buy right now.
