Last year, many investors saw their portfolios decline in value as the Nasdaq Composite tumbled into a bear market, but Ken Griffin navigated the volatility without trouble. His hedge fund, Citadel, reported a record-breaking $16 billion profit. That tops John Paulson's $15 billion profit in 2007, when he correctly bet against subprime mortgages in what has been called "the greatest trade ever."
Citadel is now the most successful hedge fund in history, and Griffin is the most profitable hedge fund manager of all time as measured by net gains, according to LCH Investments. Here are two stocks Citadel has been buying aggressively throughout the Nasdaq bear market.
1. Apple
Citadel more than tripled its stake in Apple (AAPL 1.27%) last year, and apart from options contracts used to hedge its portfolio, Apple stock is Citadel's third-largest holding. The bull case is straightforward: Apple has a strong position in several electronics end markets, including smartphones, smartwatches, and tablets. Its trendy devices inspire immense consumer loyalty, and its brand strength affords the company significant pricing power. That should keep Apple in vogue for years to come, while laying the foundation for a flourishing services business.
The tech titan recently surpassed 2 billion devices worldwide, up from 1 billion in 2016, and its services business seeks to monetize that massive installed base with mobile apps, cloud storage, and payments solutions, as well as subscription content like Apple TV+. Those products generate more consistent revenue at higher margins than hardware sales, and Apple has already positioned itself as a key player in a few of those markets. Its App Store generated twice as much revenue as Alphabet's Google Play Store last year, and Apple Wallet is the leading mobile wallet at physical points of sale among U.S. consumers.
Apple reported lackluster financial results for the first quarter of fiscal 2023 (ended Dec. 31, 2022). Revenue dropped 5% to $117 billion, due primarily to a decline in iPhone sales, and earnings fell 10% to $1.88 per diluted share. CEO Tim Cook attributed those disappointing metrics to the strong dollar, production issues in China, and the challenging economic environment. On the bright side, services revenue climbed 6%, and management believes the production problems in China have been resolved.
Looking ahead, Apple hardware should remain trendy with consumers, and the company is particularly well positioned to benefit as smartphone payments become more popular at brick-and-mortar stores in the U.S. But mobile app sales are expected to increase at 14% annually through 2026, and Apple should benefit from that as well. Additionally, the company has shown a remarkable capacity for innovation throughout its history -- consider the iPod, the iPhone, and AirPods -- and pipeline products like augmented reality glasses (rumored to launch in 2026 or 2027) could create new revenue streams of significant importance in the future.
However, shares currently trade at a pricey 28.1 times earnings, a premium compared to their five-year average of 24.4. Apple certainly has solid growth prospects, but they may not justify its current valuation multiple. Investors should consider waiting for a more reasonable entry point rather than buying this FAANG stock right now.
2. Tesla
Griffin increased his stake in Tesla (TSLA 12.06%) by a factor of 26 in 2022, and excluding numerous options held by Citadel, it ranks as its second-largest holding. The bull case is simple: Tesla is the global leader in battery electric vehicle sales, with an 18.2% market share last year, and its manufacturing expertise and full self-driving (FSD) technology promise to be powerful growth engines in the future.
Tesla has cultivated immense brand authority while spending next to nothing on traditional advertising, and its direct sales strategy allows for better cost control than partnering with dealerships. Additionally, CEO Elon Musk believes the company has the most advanced manufacturing technology in the world. Collectively, those advantages helped it achieve an industry-leading operating margin of 16.8% in 2022.
Not surprisingly, the EV maker reported stellar financial results last year, despite battling forced factory closures, supply chain disruptions, and economic headwinds. Revenue rose 51% to $81.5 billion and earnings climbed 122% to $3.62 per diluted share. But Tesla has only scratched the surface of its disruptive potential.
Ultimately, management believes its FSD platform will be the most important source of profitability, and Tesla is well-positioned to be a leader in autonomous vehicles. Musk says its cars pack the most efficient inference computer on the market, and the company has far more autonomous driving data than its peers, meaning the artificial intelligence models that power its FSD platform are likely learning more quickly than competing products.
Tesla plans to mass produce a robotaxi in 2024, a significant move in that it takes the company one step closer to its ultimate goal of operating an autonomous ride-hailing service in the future. That could be a game-changer. Precedence Research says the market for autonomous vehicles could grow 39% annually to reach $1.8 trillion by 2030, but Ark Invest estimates autonomous ride-hailing platforms could produce $9 trillion in revenue by 2030.
Currently, shares trade at 51.1 times earnings, a big discount to the historical average but a steep valuation all the same. However, that multiple could come down quickly as Tesla grows its factory footprint and begins monetizing its FSD technology more effectively. To be clear, shares could fall sharply in response to the slightest speed bump, but risk-tolerant investors should still consider buying a small position in this growth stock given its potential to disrupt the mobility and transportation industries.
