The U.S. stock market has proved quite resilient in 2024 despite seeing various fluctuations and pressures. Following an exceptionally strong 2023, the broad-based S&P 500 index has posted a 7.5% return so far in 2024.
While investors have now started worrying about a pullback as a result of high interest rates and geopolitical risks, there is still money to be made in the market. Long-term investors can pick up small stakes in fundamentally strong growth companies that are riding solid secular tailwinds to gradually build wealth.
Here's why growth stocks Broadcom (AVGO -0.38%) and Nu Holdings (NU -0.50%) both fit these criteria and can prove exceptional buys in the long run.
Broadcom
A leading high-speed networking solutions provider, Broadcom came out with solid results in the recent quarter (the fiscal 2024 first quarter ending Feb. 4), with both revenue and earnings easily surpassing consensus estimates. Investors, however, seem to be disappointed with the company's weaker-than-expected guidance for fiscal 2024 and this has affected the company's share price performance in the past month. Despite this, there are still several reasons for the long-term investor to like the stock.
First, Broadcom is witnessing solid demand for its artificial intelligence (AI)-optimized accelerators and AI-related networking components such as Tomahawk 5 800G switches, Ethernet, digital signal processing (DSP) platforms, and optical components from hyperscaler customers and large-scale enterprises deploying on-premise AI data centers. This is evident considering that the company's AI revenue quadrupled year over year to $2.3 billion in the first quarter. Broadcom now expects AI revenue to account for nearly 35% of its fiscal 2024 revenue at over $10 billion, significantly up from the prior estimate of 25%.
Second, it is very difficult for new competitors to enter the custom AI accelerator business, as it requires companies to collaborate with large clients over multiple years and create a supporting software ecosystem. Broadcom has partnered with two large hyperscalers for multiple years. Hence, the company is well positioned to capitalize on the growth in the customized AI accelerator market.
Third, the acquisition of VMware is playing a pivotal role in driving up Broadcom's infrastructure software revenue. In the first quarter, the company's infrastructure revenue was up by 153% year over year to $4.6 billion. VMware accounted for $2.1 billion in revenue during its 10.5-week-long contribution to Broadcom's first-quarter results (since the acquisition was completed in November 2023). The company expects VMware's revenue to grow at a double-digit percentage sequentially throughout fiscal 2024.
Broadcom's VMware strategy mainly rests on upselling VMware Cloud Foundation (VCF) to customers already running workloads with VMware's vSphere virtualization platform. VCF is a complete software stack (including compute, storage, and networking capabilities) that virtualizes customers' data centers. By helping create an on-premise self-service cloud platform alternative to the public cloud, VCF is allowing companies to run high-performance computation and AI workloads without compromising privacy. Plus, VMware's partnership with Nvidia is also enabling customers to run advanced AI models with VCF (using the computing power of Nvidia's advanced AI chips).
In all fairness, Broadcom's price-to-sales (P/S) ratio of 16.5x is quite expensive compared to its historical five-year average valuation of 9.2x. However, despite this, considering the many solid tailwinds, Broadcom seems to be well poised for a robust growth trajectory in the coming months.
Nu Holdings
Nu Holdings is an all-digital bank offering a range of financial solutions such as credit cards, savings and personal accounts, lending and investment solutions, and insurance in the Latin American markets of Brazil, Mexico, and Colombia.
With a high percentage of the young population (19 to 30 years) who have rapidly increasing spending and investing needs and widespread penetration of the internet, Latin America is proving to be an exceptional opportunity for the digital bank.
Nu's customer base has seen rapid expansion, growing 26% year over year to 93.9 million customers at the end of 2023. Brazil added an average of 1.3 million customers per month in 2023 and reached a total customer count of 87.8 million customers. On the other hand, Mexico and Colombia are relatively new markets, with 5.2 million and over 800,000 customers, respectively.
Nu has been quite successful in cross-selling and upselling to existing customers, which in turn has helped create a sticky customer base. This is apparent considering that its active customers were using an average of four products in the fourth quarter. The company's average revenue per active customer (ARPAC) has also grown by 23% year over year (at a constant currency rate) to $10.6 at the end of the fourth quarter. Despite this, the company's cost to serve per customer has remained steady at $0.90 on a year-over-year basis.
Nu's financial performance in the recent fourth quarter has also been stellar. Revenue grew by 57% year over year (at constant currency rates) to $2.4 billion, while net income soared by 489% year over year to $360.9 million.
However, the company is not resting on laurels and is focusing on further bolstering growth in 2024. Nu is aiming to scale up secured lending in Brazil and increase its share of the high-income segment in Brazil. Plus, it's working on scaling in Mexico by leveraging the successful launch of its Cuenta Nu digital savings account in 2023.
Nu currently trades at just under 7 times trailing-12-month sales. With analysts expecting the company's revenue to grow by a solid 38% year over year in fiscal 2024, this valuation seems quite low. Hence, considering the multiple tailwinds, solid financials, and significantly low valuation, Nu seems to be a smart pick now.
