Exploding interest in artificial intelligence (AI), driven by the launch of ChatGPT, has investors of all stripes rushing out to buy shares of tech companies with AI-related businesses. Last year, the Nasdaq Composite index shot 43% higher, thanks largely to the "Magnificent Seven," which did most of the heavy lifting.
The abbreviation "AI" means different things to different people, so picking stocks that will ride this undefined trend can be guesswork at best. As a result, individuals and institutions keep hurling cash at the Magnificent Seven while ignoring terrific growth stocks like the two below.
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There's nothing necessarily wrong with the Magnificent Seven stocks. But all the extra attention they're getting is driving up valuations, which makes it harder for new investors to realize satisfying gains.
These growth stocks aren't in the Magnificent Seven, and they have very little to do with generative AI or large language models. As a result, they're flying under the radar -- and look like great stocks to buy right now.
TransMedics Group
TransMedics Group (TMDX 3.17%) is singlehandedly improving America's solid-organ donation process. Its proprietary Organ Care System (OCS) is the only one approved by the Food and Drug Administration to preserve donated hearts, lungs, and livers after their removal, by pumping them full of warm blood.
TransMedics Group's OCS is a major improvement over the old standard: styrofoam coolers packed with ice. Perhaps the most remarkable improvement is the ability to safely transplant hearts donated after circulatory death (DCD). Without help from TransMedics, DCD hearts are almost never transplanted into waiting patients.
TransMedics' OCS also lengthens the time donated organs remain viable, which increases the distance they can travel to a transplant center. The company found itself hindered by a lack of charter flights, so it acquired an aviation business last year.
As the only company that owns an FDA-approved OCS and a fleet of jets to transport organs, TransMedics will most likely corner the organ transplantation market for years to come. Despite this advantage, there are risks associated with this richly valued stock that investors should understand before adding shares to their portfolios.
TransMedics isn't generating recurring profits yet, but it's close. In the third quarter, the company reported a net loss of $25.4 million due to $29.2 million in nonrecurring acquisition expenses.
Lately, TransMedics stock has been trading at a price of about 15 times trailing sales. This is a high valuation, but it's relatively low for this stock. If investors don't see the company report significant profits in 2024, the price could fall even further.
InMode
Medical technology company InMode (INMD 0.70%) markets a range of devices that dermatologists and plastic surgeons can build a practice around. Its proprietary radiofrequency technology is central to several devices and treatments. These include BodyTite, an increasingly popular procedure that melts and removes fat like liposuction, but without surgery.
The stock price is under pressure for a couple of reasons. First, the company overpromised in early 2023 and had to issue downward revisions to its forward outlook. Also weighing on InMode's stock is the location of its headquarters: Yokneam Illit, Israel. Management doesn't anticipate war-related interruptions to production, but it looks like the market has priced in significant disruption.
Despite its downward guidance revision, InMode still expects to say that revenue rose about 8% last year when it reports results on Tuesday, Feb. 13. On the bottom line, management expects to report adjusted earnings that grew about 5% year over year.
INMD Revenue (TTM) data by YCharts.
In five short years, InMode has grown trailing-12-month revenue by 354%, and earnings have bounded 433% higher. Even if you assume InMode will only grow its bottom line by 5% annually from now on, its present valuation of about 10.5 times trailing earnings looks like a bargain.
With proprietary devices, the company could return to the rapid growth rates we've seen over the past several years. If this happens, investors who bought the stock at today's beaten-down valuation could come out miles ahead over the long run.
