Growth stocks have been hit the hardest in the ongoing bear market. That's because they typically rise the fastest when markets are charging higher, resulting in lofty valuations. While the steep drop can be painful for shareholders, it also presents the best opportunity to juice long-term returns when markets recover.
The Nasdaq Composite index is a good gauge of the growth sector since it is heavy with technology companies. That index is now down nearly 30% in 2022, while the S&P 500 has only declined by about 21%. That makes now a prime time to identify strong growth companies whose stocks could outperform when investors are ready to take on more risk once again.
Tesla is just getting started
There is more risk with owning Tesla (TSLA 15.31%) than many other growth stocks because of how expensive the stock became relative to its business metrics. While the stock has declined by about 40% so far in 2022, its trailing-12-month price-to-earnings (P/E) ratio remains near 60. But growth investors are counting on overpriced stocks adjusting their valuations as the businesses grow.
But if Tesla simply matches its recent third-quarter results again in the fourth quarter, those earnings will have grown another 40% versus the prior-year period, helping to peck away at that P/E. With Tesla continuing to ramp up its Berlin, Germany, and Austin, Texas, factories, it should continue to see earnings growth as long as demand holds up.
The company still expects to hit its 50% annual production growth rate this year even in the face of rising competition and supply chain disruptions. Even if it only manages to grow annual production 45%, it will be producing more than 4 million electric vehicles per year by 2025.
The Tesla Semi Truck. Image source: Tesla.
Tesla is also expanding its product line with its first Semi Truck delivery expected on Dec. 1, and the Cybertruck sometime next year.
And it's not just vehicles. Its energy segment continues to see strong demand for its battery storage and solar products. Sales from that division represented 5% of total revenue in the third quarter. Revenue from its services segment reached a record in the third quarter, contributing 7.7% of total sales and including income from its Supercharger network.
Nvidia's story hasn't really changed
Semiconductor maker Nvidia (NVDA 0.03%) warned investors that its last quarter was going to be disappointing. But ever since the company reported those fiscal 2023 second-quarter results (for the period ended July 31), the stock has plunged 30%. That could be good for long-term investors because the company's story really hasn't changed.
What has changed for Nvidia is revenue coming from its gaming segment. Sales from what has been its largest division plunged 33% year over year and were 44% lower than the previous quarter. Overall revenue still grew versus the prior-year period, however, as data center sales surged.
And the long-term story that sent Nvidia shares soaring over the last few years has been its potential to grow its data center, artificial intelligence (AI), and autonomous driving segments. Growth from these areas is expected to continue.
Data source: Nvidia. Chart by author.
While its AI and autonomous driving businesses are in the early stages of growth, the auto segment could be a leader in what some estimate to become a $2 trillion market opportunity by the end of the decade.
It's still early days for Nvidia's two future growth opportunities, and its data center business continues to thrive. With the stock down more than 60% from its highs late last year, investors have repriced it so that now is a good time to buy this growth stock.
