Over the past few months, growth stock investors have been reminded the hard way that prices rarely rise in a straight line. The Vanguard Growth ETF soared by 32.8% in the first half of 2023, but it wasn't long before it started falling again.
Since the end of June, the average growth stock in the Vanguard Growth ETF has risen and fallen several times to find itself about 1% lower. However, this is good news for everyday investors who want to follow in the footsteps of some of the world's most successful investors.
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During the second quarter, billionaire fund managers bought millions of shares of Ginkgo Bioworks (DNA 10.60%) and Palantir (PLTR 3.73%). Both stocks have fallen by more than 20% from the high points they reached this summer. This means there's a good chance you could get even better prices for them than those billionaires.
Those professional fund managers would be the first to warn you that not every pick works out as hoped. Let's look at some reasons to buy these stocks to see if adding them to your own portfolio makes sense right now.
Ginkgo Bioworks
In a nutshell, Ginkgo Bioworks uses genetic engineering technology to produce new bacteria and other microorganisms for industrial applications. For example, Braskem, a chemicals company, hired Ginkgo to develop a new strain of E. coli that would also consume xylose even in the presence of glucose, which it prefers naturally. The new microbes are now used to produce ethylene glycol from leftover sugarcane pulp.
Legendary growth stock investors Israel Englander and Cathie Wood are convinced the company has a bright future as a custom microorganism engineer. During the second quarter, the firm Englander runs, Millennium Management, bought 7.3 million shares of Ginkgo, while Wood's firm, Ark Invest, bought nearly 5 million shares.
Wood and Englander were likely encouraged by increasing demand for Ginkgo's foundry services that involve designing new microorganisms, growing them in big fermentation tanks, and then harvesting their output. In the second quarter, the company had 63 active customers, up from 36 a year earlier. It added 21 new cell programs to its foundry platform in the quarter. The new programs brought the total to 105 active programs, a 44% year-over-year gain.
Before you risk any of your own money on Ginkgo, you should know it could soon reduce foundry prices to drum up business. The company reported heaps more programs and partnerships, but cell engineering revenue increased by just 2% year over year in the second quarter.
While Ginkgo is great at engaging new partners, it doesn't seem to build on many of those relationships. The investing thesis for Ginkgo relies heavily on downstream revenue in the form of milestone payments and royalties related to engineered cell lines. In the second quarter, though, downstream revenue collapsed to just $1 million from an already uninspiring $18 million in the prior-year period.
It would probably be best to keep Ginkgo Bioworks on your watch list until it looks like its cell engineering clients are as interested in it as the billionaire investors who keep plowing money into the stock.
Palantir
Big data company Palantir helps organizations analyze heaps of data from multiple sources that generally don't communicate with each other. For example, intelligence agencies in the U.S. can use Palantir's platforms to crosscheck data from an FBI database and different transportation departments to predict potential terrorist activity.
In its not-so-distant past, the company was criticized for relying too heavily on government contracts. In the second quarter, its U.S. commercial customer count surged by 35% year over year. Now, its commercial segment contributes about 44% of total revenue.
During the second quarter, surging demand for the company's services from private businesses in the U.S. and abroad likely convinced David Siegel and John Overdeck of Two Sigma to splash out on about 10.6 million shares of Palantir.
Wood is becoming a fan of the stock, too. Ark Invest opened a new position in Palantir during the second quarter, purchasing 6.8 million shares.
Palantir has reported positive GAAP (generally accepted accounting principles) earnings for three straight quarters. Proof of sustainable profitability makes this stock far less risky than Ginkgo Bioworks, but the expectations baked into its stock price are now so high that everyday investors still need to exercise caution.
Palantir stock is currently trading for around 65 times forward earnings expectations. Demand for its services is probably strong enough that the business can grow into its steep valuation over time. If the company shows any signs of a slowdown over the next several years, though, the stock could get hammered. If you're going to buy now, it would be best to make Palantir a relatively small part of a well-diversified portfolio.
