No one knows if 2024 will be a year dominated by growth stocks, value stocks, dividend stocks, or a mix of all three. But what we do know is that quality growth stocks tend to do well over time. In fact, even companies with expensive valuations relative to their trailing earnings can end up being a better value if earnings outpace the stock price growth rate.
Tesla (TSLA -1.11%), Microsoft (MSFT 1.82%), and Enphase Energy (ENPH 3.80%) aren't cheap stocks by any means. But they all have clear paths toward growing earnings years to come. Three Motley Fool contributors were asked to offer more detail on why each of these growth stocks is worth buying in 2024. Here's what they had to say.
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Tesla's growth strategy could pay off in 2024
Lee Samaha (Tesla): Companies behave differently according to their end market conditions, and that's undoubtedly the case in the auto market. Whereas the electric vehicle (EV) market is high growth, the internal combustion engine (ICE) market is not. Tesla is in the electric vehicle (EV) market; in fact, it's the market leader in the EV market by some distance. That means it must behave like a growth company and not like a traditional ICE vehicle manufacturer dealing with low-single-digit growth end markets and fighting to preserve every bit of its profit margin.
I'm belaboring the point to illustrate that Tesla's strategy of lowering prices (keeping its cars affordable as interest rate increases push up customers' monthly payments) is correct. It's not what a traditional automaker might do, but they are not generating the bulk of their sales in high-growth markets where early leadership is everything.
The strategy has cost Tesla some margin this year, but it's helped maintain Tesla's leadership in the market and kept its production plans on track.
The latter is crucial because it allows Tesla to invest in technological improvements and factory extensions that ultimately lower its cost per unit vehicle. Finally, this should pay off by enabling Tesla to offer more affordable cars in the future, maintain market share, and increase profit margin and profits.
Some of these things could come through in 2024 if interest rates move lower, giving Tesla more opportunity to raise prices.
Microsoft is a smart way to invest in artificial intelligence
Scott Levine (Microsoft): Are you among the millions who have started using OpenAI's ChatGPT to help with work tasks? Maybe you're one of the people who are testing its creative capabilities and having it compose Shakespearean sonnets for your loved ones. This past year has seen a titanic shift in the public's attention toward artificial intelligence (AI), and there's no denying how profound an effect AI will have in numerous facets of our lives from now on.
This interest from the public in the new potentials of AI is a big part of why investor interest in AI stocks like Microsoft has soared over the past year. And for those who feel like they've missed the AI boat, picking up shares of Microsoft continues to be a smart move for AI-focused investors.
Microsoft may have gained prominence with its word processing and spreadsheet offerings, but these days it's also committed to advancing AI. In addition to its $10 billion investment in Open AI, the developer of ChatGPT, Microsoft has incorporated AI into many of its own products.
Copilot, for example, is Microsoft's chatbot that complements the company's other products: Bing, Edge, and Windows. Soon Microsoft expects Copilot to use leading AI models like GPT-4 Turbo and Dall-E 3. And it's available to the masses. In addition to Alphabet's Google Play Store, the Copilot App can now be downloaded from the Apple App Store.
Illustrating Microsoft's commitment to AI, CEO Satya Nadella stated on the company's first-quarter 2024 conference call that Microsoft is "rapidly infusing AI across every layer of the tech stack and for every role of business process to drive productivity gains for our customers." For investors committed to gaining AI exposure -- and uninterested in exposing themselves to excessive risk -- Microsoft is an ideal opportunity.
Enphase has set reasonable expectations for 2024
Daniel Foelber (Enphase): Enphase stock had a wild 2023, falling just over 50%. That's even after the stock rebounded a staggering 72.2% from Nov. 1 to the end of the year.
Entering 2024, Enphase isn't as cheap as it was in late October, but it's still a better value than the company has gone for in past years, at least when looking at its trailing figures.
The issue is that Enphase's earnings could be lower in 2024 than in 2023, which means that its forward price-to-earnings ratio, or the multiple that investors can expect to pay for Enphase based on its 2024 earnings, would be more expensive than its trailing P/E based on the last 12 months of earnings.
Investors have grown accustomed to blowout results, not negative growth, from Enphase -- which is partially why the company was overvalued heading into 2023. But Enphase's slowdown illustrates just how impactful high interest rates were on the residential solar industry. Management's commentary on the company's last earnings call was fairly bleak when looking toward the near-term results. The good news is that Enphase expects things to begin turning around in the second half of 2024, which points to a rosy outlook for 2025.
The painful reality is that Enphase is an interest rate story. Many of its customers depend on financing projects with a low interest rate. Enphase itself benefits from a lower cost of capital to fuel its growth. Enphase also depends on a strong economy and excitement in the energy transition. This is all to say that banking on a quick turnaround is a bad idea.
Enphase rallied at the end of 2023 because it was oversold, not because the fundamentals have improved. Still, the worst of the sell-off should be in the past. Enphase already guided for a terrible Q4 2023, with revenue growth expected to be just $300 million to $350 million, compared to $724.7 million in Q4 2022.
The real question is how the first half of 2024 will play out. If the cycle rebounds faster than expected, Enphase stock could be teed up for an excellent year. But if Q1 and Q2 show decelerations similar to what we expect from Q4 2022, and then Enphase doesn't see the turnaround it was initially anticipating in the second half of 2024, impatient investors may decide to give up on the stock and smash the sell button.
The best way to approach a stock like Enphase is to focus on the long-term potential without losing sight of what could move the stock in the short term. Poor performance and guidance, paired with an industry-wide slowdown, wreaked havoc on Enphase in the first 10 months of last year. A widespread market rally and the prospect of lower interest rates made Enphase one of the best performers in the whole market in the last two months of the year.
Investors with a high risk tolerance could consider buying Enphase now. But this is an extremely volatile stock that could do just about anything in the short term.
