Congratulations to patient growth stock investors everywhere. After a devastating 2022, it looks like innovation is back in style. The Vanguard S&P 500 Growth ETF has risen 6.7% in 2023.
The following two growth stocks are outperforming the average stock in the benchmark index by a mile. They've already gained more than 100% this year.
Of course, a great performance in the recent past doesn't guarantee future gains. Let's look at what's pushing these stocks higher to see whether they're smart buys right now.
Carvana stock is up 129%
Carvana (CVNA 0.29%) aims to upend the used-car-buying experience, but it's done a much better job of disrupting its investors' returns. The stock is up sharply in 2023 because it started this year at a low point after collapsing 98% in 2022.
Consumers appreciate the salesperson-free, online shopping experience Carvana provides. Instead of focusing on its bottom line, though, the company borrowed heavily to meet the demand for used vehicles that soared during the pandemic's lockdown phase.
Now that the supply chain issues responsible for soaring used car prices have mostly subsided, it looks like Carvana bit off a lot more than it can chew. During the third quarter of 2022, interest expenses on its $6.6 billion debt load ballooned to $153 million. That's a lot for a relatively low-profit-margin business that generated a $359 million gross profit in the same period.
Carvana is focusing on reducing sales, general, and administrative expenses (SG&A) that came in at $656 million in the third quarter of last year. Investors should know that the company could slash SG&A expenses in half and still end up bleeding money. Avoiding this stock until management shows you it can turn a profit is probably the best course of action right now.
C3.ai stock is up 105%
Shares of C3.ai (AI -0.72%) soared to an unsustainable valuation following its stock market debut in late 2020. Despite shooting 105% higher in 2023, it's still 87% below its all-time high.
C3.ai develops applications that organizations can use to develop, deploy, and operate their own AI applications. For example, the U.S. Department of Defense has hired it to help assess the effectiveness of missile defense missions.
This stock is way up this year because enthusiasm for ChatGPT is driving investors bananas for just about anything linked to the development of generative AI applications. These are applications that generate content, such as text, code, and images, with minimal prompting from real people.
Shares of C3.ai jumped in response to the launch of the C3 Generative AI Product Suite on Jan. 31. It looks like the company is in the right place at the right time, but its stock is still a little too risky.
During the six-month period that ended on Oct. 31, 2022, C3.ai's operations lost $145 million, which is more than the company reported in top-line revenue. Signs of competitive strength in a challenging macroeconomic environment would allow us to overlook the losses, but this hasn't been the case. Sinking gross margins suggest the company lowered prices to attract and retain customers.
AI Gross Profit Margin (Quarterly) data by YCharts.
Another sign that C3 is struggling to attract and retain customers is its recent shift from subscription-based pricing to a more customer-friendly, consumption-based pricing model. This is great news for customers who might need to make spending cuts, but it probably means C3's profit margins will worsen before they improve.
C3's new generative AI products could be the hit that pulls the business out of the hole it's in. That said, it's probably best to wait for signs that this company can generate a profit before betting on its stock.
