U.S. stocks are looking shaky in August, and even that stellar earnings report from Nvidia (NVDA) could not lift investor sentiment much. Broader markets closed in the red yesterday, despite trading positive in early price action - and major market indices are on track for a notably terrible monthly performance.
Concerns over a hawkish Fed and the deepening slowdown in China are among the reasons investors have turned wary of stocks – and fears over ratings downgrades of major U.S. banks are not helping matters, either. This risk-off attitude is reflected in rising bond yields, which are particularly negative for growth stocks, as the earnings of these companies are skewed towards the future.
Despite the turbulence, I believe SoFi (SOFI) and Nvidia are two growth stocks worth buying at these prices.
Nvidia: A Core Part of Any Growth Portfolio
When we talk about growth stocks, Nvidia is one name that we cannot overlook, and I believe that the stock can be part of most growth portfolios.
While a stock’s past returns are no indicator of its future performance, it's nonetheless worthwhile to look at Nvidia’s price action. The stock has more than tripled in 2023, and the last 10 years' CAGR is a whopping 61.3% - over six times the return of the SPDR S&P 500 ETF (SPY).
In aggregate, Nvidia stock has risen 12,690% in the last 10 years, and 31,047% in the last 20 years. It's a case study example of how compounding works in well-managed quality growth companies.
Nvidia Reported Stellar Fiscal Q2 Earnings
Investors were eagerly awaiting Nvidia’s fiscal second-quarter earnings to analyze whether the company could back up the stock's mammoth 2023 rally with a commensurate financial performance - and the chip specialist came up with a stellar set of numbers that beat analysts' estimates handsomely for the second consecutive quarter.
Specifically, Nvidia posted revenues of $13.51 billion in the quarter, significantly higher than the $11.22 billion that analysts expected. It guided for revenues of $16 billion in the current quarter, which is around 27% higher than the $12.6 billion consensus forecast, and implies a YoY growth of 170%.
Many analysts had raised Nvidia’s earnings estimates ahead of its fiscal Q2 earnings, but the company’s fiscal Q2 revenues and Q3 guidance were well ahead of even the most optimistic estimates.
As expected, Wall Street analysts went into overdrive in raising the stock’s target price after the earnings report. Rosenblatt raised its target to a new Street high of $1,100, which implies a potential upside of 133% over current levels. If analyst Hans Mosemann’s prediction comes true, Nvidia’s market cap would surpass $2 trillion days after its fiscal Q1 earnings report, after joining the $1 trillion club as recently as May.
NVDA is a Play on Multiple High-Growth Industries
I believe Nvidia stock is a growth stock worth buying for the following reasons:
- Nvidia is a play on multiple emerging and secular growth industries, including generative AI, gaming, and autonomous driving. While Nvidia’s Automotive business is pacing at an annual revenue run rate of just above $1 billion, the company believes that it could be a $300 billion market opportunity as autonomous driving gains traction. The segment did post a sequential fall in fiscal Q2 revenues amid the electric vehicle slowdown in China, but the business has a positive long-term outlook.
- While a lot of companies are targeting high-growth industries, Nvidia stands out because it has a proven track record of execution and has capitalized on opportunities much better than its peers.
- Despite the monstrous rally, Nvidia does not appear overvalued, as the price action is so far backed by a commensurate increase in its earnings.
As we discussed during Nvidia’s pre-earnings analysis, the chances of a post-earnings rally were relatively dim, given the elevated expectations. The stock nonetheless looks like a good buy for growth investors, as it has multiple short-term and long-term growth catalysts.
SoFi: Another Growth Stock Worth Looking At
SoFi is another growth stock worth buying, given its strong growth prospects and reasonable valuations. The company went public in 2021 through a reverse merger with one of Chamath Palihapitiya’s special purpose acquisition companies (SPACs) - and like most other SPACs, it now trades below the debut price of $10.
However, while many other relics of the SPAC boom are either struggling for relevance or are staring at bankruptcy (many have even gone bankrupt), SoFi seems to be a genuine growth stock in the fintech space.
Looking at the company’s financial performance, SoFi generated adjusted net revenues of $488 million in Q2 - up 37% YoY to hit a new record. It was, incidentally, the ninth consecutive quarter where this metric hit record highs. Analysts expect the good run to continue in the coming quarters, and are projecting a 24.6% rise in FY 2024 revenues, with a 109% increase in net earnings.
SoFi Has Grown Responsibly
Over the last couple of years, SoFi has grown quite responsibly. While its topline growth has been strong, it hasn't compromised on margins to get there, and its EBITDA margins have increased gradually. The platform added over 584,000 new members in Q2 2023, which took its total member count to 6.2 million – up 44% compared to the corresponding quarter last year. The member count has grown by almost six times since the first quarter of 2020, when the company reported 1.08 million subscribers.
SoFi is posting positive adjusted EBITDA, and in Q2, its adjusted EBITDA was $77 million at a healthy margin of 16%. Along with its multiple fintech products – which create cross-selling opportunities into its burgeoning user base – SoFi also has a bank that gives it access to low-cost funds.
Incidentally, while a lot of former SPACs have faltered in execution and are nowhere near fulfilling the business forecasts they provided at the time of their “blank check” merger, SoFi has not only met but exceeded some parameters.
In terms of valuation, the stock trades at a next-12-months price-to-sales multiple of 3.3x, which looks attractive. As the company continues to grow and turns positive on the net profit level, it should see a valuation rerating.
Considering SoFi’s growth outlook, I believe markets are not fully appreciating the business or management’s impeccable track record, which makes it a growth stock worth buying at these levels.
On the date of publication, Mohit Oberoi had a position in: SOFI , NVDA , SPY . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
