After a rough 2022, where the bear market destroyed the valuation of many growth stocks, there's been a bit of a reversal to start this year. Many stocks that took a beating last year are already up more than 30% in 2023, including Tesla (TSLA -1.11%), Shopify (SHOP 1.11%), and Exact Sciences (EXAS 0.10%).
Here's a closer look at why investors have been bullish on these stocks of late, and whether their shares can continue to go higher.
1. Tesla
Last year, shares of electric vehicle maker Tesla crashed an incredible 65%. But to start 2023, the company has been a red-hot buy, already up 55% after just one month of trading. Investors appeared to be bullish on news that Tesla released in January, saying it would be reducing prices of its vehicles. This should help improve demand and may end up accelerating revenue growth. On U.S. models, the price cuts range between 6% and 20%.
And it's not as if Tesla's growth rate has stalled, either. For the last quarter of 2022, the company's auto sales totaled $21.3 billion and rose 33% year over year. Net income of $3.7 billion also jumped by 59% and was 15% of revenue. That suggests that Tesla can afford to eat into some of its margins for the sake of being more competitive and to generate stronger demand. Higher sales growth, after all, can help get investors bullish on a stock.
At close to 50 times future earnings, the stock isn't nearly as cheap as it was at the start of this year, and I was already hesitant about its price then. While the stock has been hot early on in 2023, I would be surprised if this rally can continue, given that its valuation is looking a bit rich again. Investors may be better off looking at growth stocks that are trading at lower valuations that have more upside.
2. Shopify
E-commerce stock Shopify had an abysmal year in 2022, with its valuations falling a mammoth 75%. And like Tesla, it has also announced changes to its prices. But it's not decreasing them.
In January, Shopify said it would be increasing the price of its plans by more than 30%. In Shopify's case, its focus is more on improving the bottom line. And while it is cutting costs and has laid off staff in an effort to improve its prospects for profitability, increasing the price of its plans can also help.
Investors have taken the price change positively, as Shopify's stock is up an impressive 52% thus far in 2023. Whether Shopify can continue the rally will depend largely on how the business performs amid these changes and if it will lose many merchants over the price increases. Investors will get a glimpse of how the company's cost-cutting efforts have been progressing later this month when Shopify releases its year-end results on Feb. 15.
I'm optimistic the stock can build on its gains as the year goes on, as last year's decline looks to have been a gross overreaction to a slowing growth rate -- which shouldn't have come as a big surprise, given the incredibly high and unsustainable rates the business was growing at during the early stages of the pandemic.
Shopify's business isn't in bad shape, and it may still be a good buy, as it's trading around the levels it was at in April 2020.
3. Exact Sciences
Exact didn't have a great year in 2022, but with a decline of 36%, its stock losses were much more modest than those that Shopify and Tesla investors incurred. The healthcare company, which makes tests to help screen for cancer, hasn't made changes to its price to stimulate its growth this year, but it did announce preliminary numbers for the fourth quarter, which appear to have helped give the stock a lift.
On Jan. 8, the company issued a press release stating that its revenue (excluding COVID-19 testing) was up 28% in Q4, for the period ended Dec. 31. The ex-COVID growth rate was also better than the 20% it reported a quarter earlier.
But while the growth rate is encouraging, Exact has a challenging road ahead with respect to profitability. Its losses over the trailing 12 months total $716 million, with no easy way for the business to get to breakeven anytime soon.
The healthcare company has significant potential in the long run as its cancer tests can help save lives with early diagnosis. Exact Sciences just needs to improve its financials; over the past 12 months it has burned through more than $300 million in cash from just its day-to-day operating activities.
If the business can show investors that it's on the right track with respect to profitability and cash flow, the stock could continue to be a hot buy this year. But that's by no means a guarantee. And if you're risk averse, the safer option is to wait on the sidelines for now. An unprofitable, cash-burning business can be a dangerous one to invest in, as that can result in frequent stock offerings, which can put significant downward pressure on the stock's price.
