The stock market has cooled a bit since the calendar turned over to 2024, but last year ended with a bang. Thanks to a year-end rally, the S&P 500 ended the year up 24%, and the Nasdaq gained 43%. These results made investors feel good but also drove up some great companies' valuations. The price you pay does matter, and some companies look richly valued.
There will be a stock market sell-off at some point, although nobody knows when. Some investors like to have a watch list of stocks to buy once prices dip. Here are three growth stocks I am keeping an eye on to add to, once the market cools.
1. Fortinet
Fortinet (FTNT 0.23%), a long-established cybersecurity company with a track record of impressive growth, is at the top of my buy list. It might not get as many headlines as its more-flashy peers, but Fortinet has a long track record of success in its field.
Since its initial public offering (IPO) in 2009, Fortinet has been profitable and free-cash-flow positive every year.
Slowdowns in revenue and billings growth affected Fortinet's stock in 2023, with double-digit drops following the last two quarters' earnings releases. Management cited a slowdown in a part of the business called Secure Networking. Fortinet believes this is a near-term challenge and expects this market opportunity to continue to grow for several years.
Despite slowing growth, third-quarter revenue increased by 16%, and billings grew by 6% year over year. Bottom-line results were more impressive with earnings per share increasing by 41%. Even at a slowing growth rate, Fortinet is still a formidable growth company that's a leader in the cybersecurity space.
Even after two large drawdowns in 2023, Fortinet's stock is up 28% over the last year, slightly outpacing the S&P 500. This places its price-to-earnings (P/E) multiple at 43. While this is below the company's historical average, it certainly isn't cheap. For comparison, competitor Cisco Systems trades for only 15 times earnings.
Fortinet is a quality business, but there could be better price points in the future.
2. Nvidia
For investors who follow the semiconductor and artificial intelligence (AI) spaces, news about Nvidia (NVDA 6.18%) has been unavoidable over the past year. The past two quarters (Nvidia's second and third of fiscal 2024) have featured triple-digit revenue growth.
This has been led by its data center segment, which saw revenue growth of 279% in the third quarter.
At some point, this growth will slow, but it's impossible to know when. Based on recent reports of companies continuing to buy Nvidia's most advanced chips, these impressive increases could be here for the foreseeable future.
In the current quarter, the company is projecting total revenue growth of more than 200%.
Nvidia currently trades for 75 times earnings and 81 times free cash flow. These multiples are above the company's 10-year historical average. Buying shares at these prices could work out if the growth projections hold, but considering the cyclical nature of the semiconductor space, it's reasonable to assume there will be better buying opportunities ahead.
3. Broadcom
Semiconductor device and software developer Broadcom (AVGO 3.84%) has also seen tailwinds related to AI. Over the past year, Broadcom stock is up nearly 100% and is currently near its all-time high. Shares now trade for around 35 times earnings and 28 times free cash flow.
When Broadcom reported its fourth-quarter and fiscal-year 2023 results in December, the market reaction was likely due to guidance rather than reported results. Year-over-year revenue growth slowed to 4% and earnings-per-share growth slipped to 5%. Both of these growth rates have been significantly higher over the last few years.
On the flip side, the company's guidance suggests that 2024 will be a much better year. Fiscal 2024 revenue is expected to be $50 billion, which represents a 39% increase over the fiscal 2023 revenue of $36 billion.
The current price and valuation are based on growth reaccelerating in 2024, due in part to AI-related spending by its customers.
Today's price is not cheap, but also not incredibly expensive by Broadcom's historical valuation. This company should remain at the forefront of the semiconductor and AI space for years to come and should be at the top of investors' watch lists for any market sell-off.
