Growth stocks suffered last year as rising inflation and general economic woes weighed on the market. Investors preferred safer stocks, such as those that pay dividends or companies selling goods or services we always need -- like healthcare. Since the start of this year, though, investors have begun to look toward brighter days, and to prepare, they're snapping up growth stocks.
A bull market may be right around the corner, and these sorts of players are likely to benefit from that environment. Two ultra-growth stocks already are leading the market recovery. I'm talking about Amazon (AMZN -0.07%) and Tesla (TSLA -0.69%), posting gains of 50% and about 100%, respectively, this year. And the good news is they both have what it takes to climb higher over time. Let's take a closer look.
1. Amazon
Amazon is a leader in two high-growth industries: e-commerce and cloud computing, which are both set to expand in the double digits throughout this decade. And Amazon may be better positioned than ever to benefit. That's because Amazon has spent the past year or so improving its cost structure by cutting jobs, making its fulfillment network more efficient, and focusing investments in key areas such as technology infrastructure.
The company made these moves as the tough economic context weighed on its own costs and on its customers' buying power, which hurt earnings. And the efforts have already started to bear fruit. In the most recent quarter, Amazon reported increases in net sales and operating income, and the company shifted to a profit from a loss in the year-earlier quarter.
In other positive news, Amazon Web Services' (AWS) clients, after months of reining in spending, are beginning to launch new projects again. This is key because AWS typically has been Amazon's biggest profit driver.
Amazon still faces challenges. For example, the Federal Trade Commission and several states just filed a lawsuit against the company, claiming monopolistic practices. And the ongoing high interest rate environment means Amazon's full recovery and growth may take time.
But over the long term, Amazon's market leadership and new cost structure should help it win. And that means the stock, trading considerably lower than usual in relation to sales, looks like a bargain right now.
AMZN PS Ratio data by YCharts.
2. Tesla
The bad news is Tesla faces increasing competition in the electric vehicle (EV) market. Bank of America even predicts Tesla's market share could fall to 18% in 2026 from a high of 78% in 2018.
Now here's the good news: Even in this context, Tesla should continue to benefit thanks to its brand strength and the fact that the EV market is booming. The worldwide EV market is set to expand in the double digits this decade, suggesting there is room for more than one player to thrive.
Tesla already has demonstrated its strength through tough times. In spite of recent and current headwinds, such as higher interest rates, negative currency impact, and supply chain issues, Tesla has kept earnings climbing. In the most recent quarter, the company reported record production and deliveries.
The EV giant also achieved an operating margin of 10% even as it cut prices on certain vehicle models. This success is thanks to Tesla's management of costs and efficient use of new factories.
The key metrics of free cash flow and return on invested capital have dipped in recent times but have still progressed significantly over the past five years. This shows the company has the resources to boost growth, and its investments so far are paying off.
TSLA Free Cash Flow data by YCharts.
Meanwhile, Tesla isn't parked in neutral. The company is racing ahead by investing in research and development, creating new products, and using artificial intelligence in many ways (for example, to advance its self-driving technology).
Trading at 70 times forward-earnings estimates, Tesla isn't exactly cheap. But considering the company's high-growth potential over time, it isn't too late to get in on this EV powerhouse.
