Editor's note: This article has been corrected. Drew Wilkerson is CEO of RXO.
Investing in high-growth stocks takes the proper outlook and mindset. Investors should be looking at holding for the long term and realize there will be much volatility along the way. That is magnified even further when these companies are working to build out disruptive technologies.
Owners of two widely followed stocks experienced that turbulence in a big way as a bear market progressed in 2022. Stocks of electric vehicle trailblazer Tesla (TSLA 4.96%) and semiconductor chip disruptor Nvidia (NVDA 3.71%) plunged 65% and 50%, respectively, last year. But both have rebounded sharply in 2023, providing a glimpse into the kind of roller coaster ride stocks like these can take in a relatively short period. While the investment risk grew with the recent stock price surges, both companies still offer the potential for huge gains ahead.
The promise of AI
Investors were flocking to Nvidia as its gaming and data center segment revenues soared throughout its fiscal 2021 and 2022 periods. Then a shock came in the quarterly period ended July 31, 2022. Sales from gaming chips suddenly plummeted 44% from the previous quarter.
Data center revenue growth also leveled out, and investors were then looking at a richly valued growth stock that wasn't growing sales any longer. Total revenue dropped 17% and 21% year over year in Nvidia's most recent two quarterly periods.
Data source: Nvidia. Chart by author.
Yet there are reasons to sense another growth surge is coming as gaming revenue turns the corner and the promise of Nvidia's smaller segments begin to materialize. Nvidia's omniverse, or professional visualization, products are being used in the booming artificial intelligence (AI) field.
AI chatbots were already being used to develop learning language models used behind the scenes in businesses. But the launch of OpenAI's ChatGPT initiated a consumer-facing use case for the technology that highlighted its development.
The forefront of new technologies
One behind-the-scenes example of using AI to help businesses become more efficient can be seen with e-commerce giant Amazon. Stefano Perego, one of the company's logistics vice presidents, recently explained in an interview that Amazon is using AI to reduce delivery times and costs. The technology utilizes data and trends to help get the right amount of product inventory in the right places at the right times. Similarly, RXO CEO Drew Wilkerson recently told attendees at the Goldman Sachs Industrials and Materials Conference that his company's high margins can partly be attributed to AI using algorithms to help determine proper pricing from the perspectives of both the carrier and its customers.
Nvidia will be riding a tailwind of more and more uses for AI, both by businesses and consumers. Nvidia investors also can have a stake in the growth of driver assistance systems and autonomous driving from its auto segment as those technologies progress and expand. That potential explains the high valuation for Nvidia shares. For those willing to accept the risks that come along with that, Nvidia is a stock worth owning now. Its next update for investors comes from its quarterly report due on May 24.
More than just EVs
Tesla also has its foot firmly in the door of nascent technologies and growing trends -- and not just with its quickly increasing EV sales. For all the talk of oncoming competition and dropping demand, Tesla still grew its vehicle production and revenue by 44% and 24%, respectively, year over year in the first quarter.
While its price cuts resulted in a lower profit margin and earnings for the period, the growth story remains intact. Tesla is successfully ramping up production at its newest plants and has already announced additional investments to expand and build new factories. Despite all the focus on the lower margins, Tesla still reported $2.5 billion in net income for the first quarter. Tesla is willing to sacrifice some near-term profits to expand its customer base anticipating higher margin sales with assisted and autonomous driving options later.
Tesla has an established business with its energy segment. It deployed a record amount of storage battery packs in the first quarter. Tesla also recently announced a new commercial battery storage (megapack) plant to be built in China. At the same time, it continues to ramp up its California plant, which still hasn't reached full capacity.
Image source: Tesla. Megapack battery storage factory in California.
With Tesla's price-to-earnings (P/E) ratio hovering near 50 based on last year's results, it remains an expensive stock using a near-term outlook. That's especially the case if its vehicle pricing strategy ends up capping its earnings growth in 2023.
The resulting lower profit margins and 2023 earnings won't be a concern if the strategy to expand its customer base for future autopilot and full self-driving (FSD) technologies plays out, though. Therein lies the risk. If its energy business and vehicle technologies don't grow, the stock will be punished. But there will likely be huge gains made should Tesla's sweeping plans come to fruition.
