2023 has been a great year for stocks. The S&P 500 has gained around 24%, fueled in part by the artificial intelligence (AI) boom that has sent some tech stocks flying. The so-called Magnificent Seven, a group of megacap stocks, have led the way this year.
What works in any individual year is tough to predict, but investors can succeed in the long run by buying shares of high-quality companies with solid growth potential trading at reasonable prices. Looking ahead to 2024, chip giant Intel (INTC -9.20%), programmatic advertising platform PubMatic (PUBM 1.75%), and grocery chain Sprouts Farmers Market (SFM 1.64%) look like promising stocks with incredible growth opportunities.
Intel
Intel has had a tough couple of years. Demand for PCs cratered following a pandemic-era boom, and the company has been losing share in the server CPU market to rival AMD. Comebacks in both markets are starting to take shape. Intel launched its AI-powered Meteor Lake laptop CPUs earlier this month, along with a new family of capable server chips.
Intel's biggest long-term growth opportunity, though, is the foundry business. By making advanced chips for third parties, the company will expand its addressable market beyond PCs and servers.
More than 1 billion smartphones are sold globally each year, and Intel currently has no meaningful presence in that market. Through a partnership with Arm Holdings, Intel will be a viable manufacturing option for smartphone chip designers in 2025 and beyond.
AI chips represent another opportunity for Intel. While the company makes its own AI accelerators, it will also be vying for deals to manufacture AI chips for others in the years ahead. The AI chip market could soar to nearly $400 billion by 2032, requiring cutting-edge manufacturing and advanced packaging capacity well beyond what's available today.
The global foundry market topped $100 billion in 2022 and is expected to more than double in size by 2032. While Intel's foundry business is tiny right now, it will likely start to pick up steam in 2024.
The company has snagged a few unnamed customers for its upcoming Intel 18A manufacturing process, which it expects to surpass market leader TSMC technologically once it's ready late next year. In 2025 and beyond, Intel's foundry revenue could explode as the Intel 18A process picks up more customers.
PubMatic
A tough digital advertising market has stunted PubMatic's growth, but this sluggishness won't last forever. Revenue for the sell-side programmatic advertising platform provider, which helps publishers and app developers find buyers for ad space, was down 1% year over year in the third quarter, but the company expects to stage a recovery in the fourth quarter. Based on the midpoint of its guidance, PubMatic's fourth-quarter revenue should rise about 5% from the prior-year period.
As PubMatic weathers this difficult environment, the company has slashed capital spending to account for sluggish demand. Unlike many of its competitors, PubMatic owns and operates its own infrastructure instead of relying on public cloud platforms.
One benefit of this strategy is that PubMatic can greatly reduce capital spending when demand is weak. Capital spending will drop approximately 70% this year, compared to 2022.
Slashing this spending frees up cash, which PubMatic is smartly using to buy back its own stock. The company generated $17.2 million of free cash flow in the third quarter on $63.7 million of revenue. So far this year, PubMatic has spent about $41.5 million on share buybacks. With the stock down 40% from its all-time high, those buybacks make a lot of sense.
PubMatic's results will ebb and flow with the digital advertising market, but its long-term opportunity is enormous. The digital advertising market topped $600 billion in 2022 and is expected to nearly double by 2027. While PubMatic doesn't compete for all those dollars, the company won't be short of growth opportunities anytime soon.
Sprouts Farmers Market
Grocery store chain Sprouts has found a lucrative niche. The company primarily sells attribute-based products, which carry labels like organic, vegan, gluten-free, paleo, etc. More than 70% of the products Sprouts carries are attribute-based. It also emphasizes produce, dedicating a large section of each store to fruits and vegetables, with pricing that often beats the competition.
This combination has resonated with Sprouts' customer base. Revenue jumped 7.6% year over year in the third quarter, with comparable-store sales rising by 3.9%. Compare that to megachain Kroger, which suffered a slight decline in a comparable sale in the third quarter.
One thing that makes Sprouts' growth story compelling is its plan to rapidly grow its store count. Sprouts' stores are already much smaller than traditional grocery stores, and a new format will drop the square footage by more than 20%. These smaller stores are cheaper to build and run and can be built in places where a huge supermarket wouldn't work.
After opening about 30 new stores in 2023 and bringing its store count to just above 400, Sprouts plans to grow the store count by 10% annually in 2024 and beyond. In expansion markets, which include California, Texas, Florida, and a few other states, Sprouts sees an opportunity to eventually open as many as 400 additional stores.
Sprouts is a rare growth story in an otherwise unexciting industry dominated by megachains. While the stock has soared this year, it still trades at a reasonable valuation of about 17x earnings guidance. With the company targeting double-digit earnings growth, the stock looks like a good deal.
