With just over a month to go in 2024, it's fair to say that it's been a good year for stocks. The S&P 500 index's level has risen 26% across the stretch, and the more growth-oriented Nasdaq Composite index has rocketed 42% higher.
While a powerful bull market is in swing and some companies are rocketing to new highs, there are still high-quality growth stocks out there that are trading far below previous valuation peaks. With that in mind, read on to see why two Motley Fool contributors think these stocks are good buys while they're still down big from their highs.
Micron Technology's AI potential is being underestimated
Keith Noonan: Like some other high-profile chip companies, Micron Technology (MU 6.68%) has seen increased sales and profits, thanks to artificial intelligence (AI) trends. The company is a leading provider of memory solutions, and rising demand for storage that can hold the data for AI applications has driven revenue higher.
NASDAQ: MU
Key Data Points
Sales increased 93% to hit $7.75 billion in the fourth quarter of the company's last fiscal year, which ended Aug. 29. Even better, much of the sales growth was driven by high-margin DRAM and high-bandwidth-memory (HBM) solutions.
Thanks to surging sales and improving gross profit margins due to a better sales makeup, the business managed to record a non-GAAP (adjusted) net profit of roughly $1.34 billion. For comparison, the business posted an adjusted loss of $1.18 billion in the prior-year period.
Management also expects continued improvement in the near term. For the first quarter of its current fiscal year, Micron expects sales of roughly $8.7 billion -- good for growth of roughly 84% year over year and 12% on a sequential quarterly basis. The company's adjusted gross margin is also projected to improve to roughly 39.5% -- up from 36.5% last quarter.
The stock's performance has been uneven. Its gain of 18% has lagged significantly behind the 26% rally for the S&P 500 this year. And the memory-chip specialist is still down 34% from its high. There's a reason why the stock isn't trading at all-time highs despite great results.
The memory chip industry is highly cyclical, and performance is impacted by macroeconomic conditions and more specific shifts and cycles in the consumer and enterprise markets. The timing of these cyclical shifts can be difficult to predict, and charting Micron's business performance involves a high degree of speculation because of this. Some analysts are betting that enterprise demand for HBM solutions will weaken and softness in the consumer market will also depress performance.
While Micron isn't a low-risk investment, the company's potential to see long-term benefits from the scaling of AI infrastructure appears to be underappreciated. For investors looking for attractive risk-reward profiles in the AI space, the stock looks like a good buy right now.
GXO Logistics: Compelling valuation and recovery prospects
Lee Samaha: GXO Logistics (GXO 5.63%) stock is down roughly 42% from its all-time high. GXO designs and operates warehouses for customers looking to outsource these operations. Its disappointing stock price performance might make you think there's something wrong with the contract logistics provider.
However, the reality is entirely different. The decline happened because it was spun off from freight transportation company XPO in the summer of 2021 at the height of optimism over GXO'sprospects.
Back then, e-commerce growth went ballistic, driven by the artificial stimulus to demand that was created by the lockdown measures. Once the restrictions subsided, e-commerce retracted, and GXO's organic growth slowed as customers pulled back after a previous ramp up in spending.
NYSE: GXO
Key Data Points
The decline has arguably been overdone, particularly as e-commerce growth is back on track. Management believes its organic revenue growth will improve from 2% in 2023 and 2%-5% in 2024 to a compound annual growth rate of about 10% from 2024 to 2027. The optimism comes down to the increasing complexity of supply chains, which encourages companies to outsource their warehousing, distribution, order fulfillment, and e-commerce services to GXO.
In addition, the growth in specialized warehouse technology, such as automation, advanced predictive analytics, and smart warehouses, and GXO's expertise in handling these technologies is enhancing the value of its offering. As such, more companies will likely outsource their logistics to GXO so they can focus on their core activity. In addition, existing customers looking to expand internationally may also require GXO's services.
Trading at 22 times estimated 2024 earnings and with double-digit revenue and earnings growth ahead for the next few years, GXO looks like an excellent growth stock at a reasonable price.
