Many growth stocks soared over the past year as investors focused on future interest rate cuts. But as the bulls rush back and the S&P 500 and Nasdaq Composite hover near their all-time highs, investors might become reluctant to buy more growth stocks.
It's smart to be prudent in a bull market, but it's still a good idea to accumulate shares of promising companies that could grow much larger over the next decade. I believe these three tech companies fit that description: Advanced Micro Devices (AMD 1.45%), ASML (ASML -1.30%), and Pinterest (PINS -0.91%).
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1. Advanced Micro Devices
Advanced Micro Devices (or AMD) is the world's second-largest producer of x86 CPUs and discrete GPUs. It competes against Intel in CPUs and Nvidia in GPUs, and it has kept pace with both of those larger competitors by selling comparable chips at lower prices.
It also pulled ahead of Intel in the "process race" of manufacturing smaller and denser CPUs by outsourcing most of its production to Taiwan Semiconductor Manufacturing.
In 2023, AMD's revenue and adjusted earnings per share (EPS) declined 4% and 24%, respectively, as PC shipments tumbled. But as the PC market cooled off, AMD ramped up its production of new data center GPUs for processing AI tasks. These new chips are cheaper than Nvidia's data center GPUs, and they're already being adopted by tech giants like Microsoft, Meta Platforms, and Oracle.
Analysts expect the expansion of AMD's data center business -- along with the stabilization and growth of the PC market -- to boost its revenue and adjusted EPS by 14% and 37%, respectively, in 2024.
AMD's stock isn't cheap at 47 times next year's earnings, but it could head a lot higher over the next few years as it profits from the secular expansion of the AI market. It can also continue growing in the data center market by bundling its Epyc server CPUs, Instinct GPUs, and programmable chips (from its acquisition of Xilinx in 2022).
2. ASML
ASML is the world's leading producer of lithography systems, which are used to optically etch circuit patterns onto silicon wafers. It's also the only producer of high-end extreme ultraviolet (EUV) lithography systems, which TSMC, Intel, Samsung, and other leading chip foundries use to manufacture the world's smallest chips.
Revenue and EPS rose 30% and 41%, respectively, in 2023. The company profited from the intensifying competition among TSMC, Intel, and Samsung, which all scrambled to install more EUV systems to produce smaller and denser chips.
But for 2024, analysts expect ASML's revenue to rise just 2% as its earnings dip 3%. That slowdown will be mainly caused by the recent export curbs against its EUV system shipments to Chinese chipmakers. For 2025, it expects its growth to accelerate as it laps those restrictions and ramps up deliveries of its new high-NA EUV systems -- which will enable chipmakers to manufacture even smaller chips beyond the 2-nanometer limit.
Over the long term, ASML aims to generate 44 billion euros ($48 billion) to 60 billion euros ($65 billion) in revenue by 2030. That would represent a compound annual growth rate (CAGR) of 7% to 12% from 2023.
The stock might seem a bit pricey at 31 times next year's earnings, but its monopolization of a crucial chipmaking technology justifies that higher valuation. And it should still be a great tech stock to buy, hold, and forget about for the next decade.
3. Pinterest
Pinterest is a social media company that lets its users share their hobbies, interests, and ideas on virtual boards, which makes it a natural platform for companies to promote and sell their products through shoppable "pins." That makes it a good play on the secular expansion of the nascent "social shopping" market.
In 2023, revenue rose only 9% as it stayed unprofitable on the basis of generally accepted accounting principles (GAAP) for the second straight year. That slowdown was caused by tough macro headwinds for the advertising market, a loss of momentum after its pandemic-era growth spurt, and stiff competition from Meta's Instagram, ByteDance's TikTok, and other hybrid social-shopping platforms.
But in the second half of 2023, Pinterest turned profitable again on a GAAP basis. It also ended the year with 498 million monthly active users (MAUs), which represented 11% annual growth and a significant acceleration from its 4% MAU growth in 2022. That expansion should counter the bearish notion that it's a pandemic-era fad stock.
Analysts expect its revenue and adjusted EPS to rise 17% and 24%, respectively, in 2024. It foresees an influx of Gen Z users, its overseas expansion, fresh video content, and its new artificial intelligence (AI)-driven recommendations to fuel its long-term growth.
Pinterest's stock still looks reasonably valued at 28 times forward earnings. If you believe it can defend its niche and continue expanding in the e-commerce market with its shoppable pins, it might be a great growth stock for the next decade.
