Wall Street turned in a banner performance in 2023. When the curtain closed, the Dow Jones Industrial Average had managed to hit multiple record highs, while the S&P 500 and Nasdaq Composite shot higher by 24% and 43%, respectively. A fresh bull market has emerged, and growth stocks are to thank for it.
Although the "Magnificent Seven" have collectively taken credit for the outperformance of the S&P 500 and Nasdaq Composite since the start of 2023, no megacap growth stock has stood out more than semiconductor company Nvidia (NVDA 6.18%). Shares have skyrocketed more than 327% in less than 13 months, with the company tacking on more than $1 trillion in market value.
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Headwinds are mounting for Nvidia
Nvidia's outperformance is a reflection of the company becoming the infrastructure backbone of the artificial-intelligence (AI) movement. The company's A100 and H100 graphics processing units (GPUs) are expected to account for up to 90% of the GPUs being put to work in high-compute data centers in 2024.
In particular, Nvidia's pricing power with its AI-focused GPUs has been off the charts due to GPU scarcity. This phenomenal pricing power has been a big help to Nvidia's gross margin, given that its cost of revenue has moved only modestly higher.
But this top-performing megacap stock is set to face mounting headwinds in 2024 (and beyond). Ironically, ramping up production of its A100 and H100 chips is likely to be a net negative for its gross margin. A substantial uptick in GPU production will reduce AI-GPU scarcity and diminish the company's pricing power.
At the same time, competition in AI-inspired GPUs will progressively increase. Advanced Micro Devices and Intel know a thing or two about innovation and data center operations. Both companies are direct competitors to Nvidia's high-compute data center dominance.
I'll also add that U.S. regulators are doing Nvidia no favors. On two separate occasions, regulators have imposed restrictions on what chips the company can export to China, the world's No. 2 economy by gross domestic product. Even GPUs that Nvidia designed specifically for China have been restricted. These export limitations could cost Nvidia billions of dollars in potential sales each quarter.
Lastly, every next-big-thing investment over the past three decades has eventually gone through an initial bubble period. Wall Street and investors historically overestimate the uptake of new technologies and innovations. AI is unlikely to be the exception to this rule, which means Nvidia could be in for a challenging year.
These two high-octane growth stocks offer substantially more upside than Nvidia
Although Nvidia has proved me and other skeptics wrong through the first month of 2024, there are enough red flags to suggest investors should avoid Nvidia, or perhaps forget about it altogether, until its valuation makes more sense.
But just because Nvidia is rife with warning signs, it doesn't mean all high-growth stocks are worth avoiding. What follows are two supercharged growth stocks with far more tantalizing upside in 2024 than Nvidia.
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Fastly
The first fast-paced stock that has the tools in place to outperform Nvidia in 2024 is edge computing company Fastly (FSLY 4.43%).
Fastly is best-known for its content delivery network, which is tasked with moving data from the edge of the cloud to end users as quickly and securely as possible. The clear catalyst for Fastly is the expectation that content consumption will continue to climb, thus requiring ever-increasing network capacity. Since Fastly is a usage-driven business, the accelerated shift we've witnessed of data online and into the cloud following the COVID-19 pandemic is a good thing.
While it's not been a straight-line expansion for Fastly, many of the company's key performance indicators are moving in the right direction.
From the end of 2021 to the close of business in September 2023, enterprise customer count rose by 80 to 547; average enterprise customer spend increased from $704,000 to $832,000; and the company's dollar-based net expansion rate (DBNER) stayed firm between 118% and 123%. DBNER implies that existing clients are consistently spending between 18% and 23% more on a year-over-year basis, which, once again, is great news for Fastly's usage-driven operating model.
Another reason Fastly stock can fly is the strength of its management team. In September 2022, Todd Nightingale took over as CEO. Nightingale came over from Cisco Systems, where he developed the strategy for the company's Enterprise Networking and Cloud segment. Not only has Nightingale brought innovation to the table, but he keenly understands how to reduce costs, which is something Fastly sorely needed after larger-than-anticipated losses in 2021 and throughout most of 2022.
With Nightingale steering the ship, Fastly has a real opportunity to turn the corner to recurring profits this year. Considering Wall Street expects a 30% annualized earnings growth rate from Fastly over the next five years, it looks like a shoo-in to outpace Nvidia in 2024 (and beyond).
Fiverr International
The second supercharged growth stock that offers significantly more upside in 2024 than Nvidia is online-services marketplace Fiverr International (FVRR 3.74%).
If there's a knock against Fiverr, it's that the company is cyclical. Economic downturns and contractions are often associated with an increase in the unemployment rate. Since Fiverr's operating model helps connect freelancers with businesses that desire their services, a strong labor market and economy are needed.
But here's the thing: Recessions are historically short-lived. Since World War II ended in September 1945, there have been 12 official recessions, and none have surpassed 18 months in length. That compares to two expansions that hit the decade mark. Over longer periods, betting on the American economy to thrive has been a smart move.
Another macro factor working in Fiverr's favor is the changing dynamic of the labor market following the COVID-19 pandemic. Though some people have returned to the office, more workers than ever are operating remotely. This permanent shift in the workforce plays right into Fiverr's long-term growth plans.
One of the key differentiating factors for Fiverr is how its freelancers price their services. Whereas most competing online-service marketplaces allow freelancers to price their work at an hourly rate, Fiverr's freelancers list their tasks as an all-inclusive price. The price transparency with Fiverr is unparalleled, which is probably why spend per buyer has continually climbed.
But the real driving force behind Fiverr's growth is its take rate -- i.e., the percentage of each deal negotiated on its platform, including fees, that it gets to keep. While key competitors are enjoying take rates in the mid-teens, Fiverr's expanded to 31.3% in the September-ended quarter.
Fiverr is taking a progressively bigger cut, yet its freelancer base and spend per buyer have steadily grown. This ideal recipe is expected to result in triple-digit annualized earnings growth over the next five years.
