When the curtain closed on 2023, optimists emerged as winners (as is often the case). Although the Dow Jones Industrial Average made headlines for streaking to a record high, it's the 43% gain for the Nasdaq Composite and the even more robust 54% increase in the Nasdaq-100 that really shined brightest. These gains demonstrate that investors' appetites for growth stocks and innovation is as strong as ever.
But just because the Nasdaq-100 was a standout index in 2023 doesn't mean all 101 of its components share the same outlook. (One company has two classes of shares, which is why there are 101 and not 100 components.) As we push ahead into 2024, two Nasdaq-100 stocks have separated themselves as exceptional buys, while another high-flying component with waning first-mover advantages is worth avoiding.
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Nasdaq-100 stock No. 1 that's a screaming buy in 2024: PayPal Holdings
Though investors can probably find a handful of Nasdaq-100 stocks with a lower price-to-earnings (P/E) ratio, few offer a more attractive price-to-earnings-growth ratio (PEG ratio) than fintech leader PayPal Holdings (PYPL 2.90%). PayPal's stock finds itself roughly 80% below its all-time high.
This massive pullback is a function of two things: weaker gross margin, as competition in digital payments picks up, and concerns that a higher inflation rate would crimp the discretionary purchasing power of low-earning workers. PayPal is predominantly a fee-driven platform, so fewer transactions are expected to translate into lower gross profit.
While these are tangible worries, they're not overly concerning, given PayPal's continually improving key performance indicators, as well as the growth trajectory for digital payments. With regard to the latter, a 2023 report from Boston Consulting Group estimates that global fintech revenue can grow by more than 500% to $1.5 trillion by 2030.
But what's far more exciting than fintech's growth trajectory still being in the early innings is PayPal's steadily improving user-engagement statistics. In less than three years, the average active account on PayPal's digital networks went from completing fewer than 41 transactions on a trailing-12-month (TTM) basis to nearly 57 transactions over the TTM. More transactions should yield successively higher fees for PayPal and steadily grow its gross profit.
I'll add to the above that even with its active account growth stymied at the moment, total payment volume (TPV) traversing its networks has been increasing by a sustained double-digit percentage, without currency movements. When the U.S. and global economy are firing on all cylinders, annual TPV growth of 20% may be sustainable.
Getting back to the main point, PayPal's valuation makes a lot of sense for both growth and value seekers. Even though Wall Street's consensus is for PayPal to increase its earnings per share (EPS) by better than 18% on an annualized basis over the next five years, its shares can be purchased for just 11 times forward-year earnings. That's a PEG ratio of well below 1, which signifies what an incredible value PayPal is right now.
Nasdaq-100 stock No. 2 that's a screaming buy in 2024: Starbucks
A second Nasdaq-100 stock that makes for a screaming buy in the new year is well-known coffee chain Starbucks (SBUX 0.47%).
The past couple of years have been challenging for Starbucks for two reasons. First, the COVID-19 pandemic required the company to adjust its operating model during a period of unpredictable store closures. This includes in China, which continued to lock down various cities and provinces until late in 2022. Starbucks ended fiscal 2023 (Starbucks' fiscal year closed on Oct. 1, 2023) with over 6,800 stores in China.
The other headwind for Starbucks has been inflation. While some degree of rising prices is expected, the biggest name in coffee dealt with rapidly rising labor costs (including unionization efforts at select stores) and a surge in the price of coffee. Higher operating costs have a way of squeezing margins.
But there's good news on this front. If there's one thing Starbucks possesses, it's exceptional pricing power. Saturating key markets in developed countries, coupled with its well-known brand, has enabled the company to increase its prices above and beyond the rate of inflation. In other words, inflation has actually served as a tailwind that's helped sustain a double-digit growth rate.
Another reason Starbucks has been practically unstoppable is the relatively steady expansion of its Rewards Membership program. The company closed out fiscal 2023 with 32.6 million active Rewards members, which is up 14% from the prior year. Rewards members spend more per ticket than non-Rewards customers and are also more likely to utilize mobile ordering, which shortens wait times in stores.
Perhaps the biggest change since the pandemic began that's really paid off for Starbucks is the revamping of its drive-thru experience. The company updated its ordering boards to include video of its baristas to make the experience more personal. Further, food and beverage pairings are now promoted to encourage the purchase of higher-margin items.
Starbucks also sports a historically attractive valuation. Shares can be purchased right now for less than 20 times forward-year earnings. That's lower than any point over the past decade and represents a 35% discount to its average forward-year earnings multiple over the previous five years.
Cybertruck deliveries began on November 30. Image source: Tesla.
The Nasdaq-100 stock to avoid in the new year: Tesla
While it played a key role in pushing the Nasdaq-100 higher by 54% in 2023, the one component I'd suggest steering clear of in 2024 is none other than North America's leading electric-vehicle (EV) manufacturer Tesla (TSLA -1.11%).
Shares of Tesla more than doubled last year, with increased EV production and the rollout of the Cybertruck fueling those gains. With regard to the former, Tesla set out to produce 1.8 million EVs in 2023 and achieved this mark with ease (1,845,985 EVs produced).
It also officially began deliveries of the Cybertruck on Nov. 30. With CEO Elon Musk previously noting that over 1 million $100 refundable deposits had been placed to secure a reservation for a Cybertruck, there's plenty of optimism that strong follow-through can lead to a big uptick in sales and profits. Tesla is working on its fourth consecutive year of generally accepted accounting principles (GAAP) profit.
However, Tesla's outperformance last year in no way matches how the company has performed from an operating standpoint.
Despite having first-mover advantages in the EV space, Tesla kicked off a price war with other EV manufacturers in 2023. During the company's annual shareholder meeting in May, Musk concisely noted that Tesla's pricing strategy is dictated by demand for its vehicles. More than a half-dozen price cuts across Model's 3, S, X, and Y all but confirm that inventory levels are rising and competition is becoming a thorn in its side.
Although price cuts have been able to somewhat slow the pace by which Tesla's global vehicle inventory is increasing, these cost reductions are decimating the company's operating margin. Over the TTM period ended Sept. 30, Tesla's operating margin has been more than halved to 7.6% from 17.2%. This puts the company's operating margin on par with most legacy automakers.
Something else for investors to be concerned about is the risk of having Elon Musk as CEO. Despite successfully bringing a handful of EVs to market, Musk has a laundry list of promised innovations that have failed to materialize. If these unfulfilled promises are backed out of Tesla's valuation, it's my contention that shares could fall below $100 in 2024.
A forward-year earnings multiple of nearly 65 makes little sense for an auto stock with a plunging operating margin that's also generating a significant percentage of its pre-tax income from unsustainable sources.
