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2 Cheap Growth Stocks to Buy Before They Soar 71% and 100%, According to Select Wall Street Analysts

The S&P500 up 28% over the past year, but Wall Street analysts still see plenty of buying opportunity in the stock market.

Adam Jonas op Morgan Stanley has put Tesla (NASDAQ: TSLA) with a 12-month price target of $345 per share, implying an upside of 71% from the current price of $202. This also applies to Sean Dunlop Morning star has given Etsy (NASDAQ: ETSY) a twelve-month price target of $140 per share, implying an upside of 100% from the current price of $70.

Investors should always treat these short-term forecasts with skepticism, especially when they come from individual analysts. But Tesla and Etsy deserve further consideration given the potential opportunities involved.

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Tesla reported disappointing fourth-quarter financial results, missing top and bottom line estimates. Revenue rose just 3% year over year to $25.2 billion, a slowdown from 9% growth in the third quarter and 37% growth in the same period a year ago. In addition, non-GAAP net income fell 39% to $2.5 billion as price cuts caused operating margin to decline. Management also warned that vehicle volume growth could be much lower this year as the company ramps up investments in its next-generation vehicle platform.

However, there were a few silver linings. First, price cuts should stop or even be reversed if interest rates fall and demand revives, which could happen this year. Second, Tesla is the leader in battery electric vehicles, and its next-generation car could expand its addressable market by charging a much lower price point, perhaps as low as $25,000. Third, the company has achieved industry-leading margins in the past, and it could do so again as it deploys new manufacturing systems and focuses on full self-driving (FSD) software and robotaxi services (i.e. autonomous driving).

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According to management, the production system Tesla will use to produce its next-generation car could cut production costs in half and reduce its factory footprint by 40%. Likewise, the FSD software should become increasingly attractive as the product moves towards full autonomy. Tesla already sells FSD subscriptions to drivers, but also plans to monetize the software through licensing deals with other automakers and robotaxi services. Ultimately, that transformation could push gross margin to 70%, up from about 18% now, CEO Elon Musk said.

With that in mind, electric vehicle sales are expected to grow 15% annually through 2030, while autonomous vehicle revenues are expected to grow 22% annually over the same period, according to Grand View Research. That gives Tesla a chance for annual sales growth of more than 20% by the end of the decade.

In fact, Morgan Stanley’s Adam Jonas expects the company’s revenue to grow 23% annually over the next eight years. That estimate includes a substantial contribution from FSD software and mobility services, but the current valuation of 7.2 times sales would be cheap if Tesla were to hit that target.

Investors who believe Tesla has a future in FSD software and robotaxi services should consider buying a small position today, but not on the assumption that the stock will rise 71% anytime soon. The near-term outlook is bleak given the high interest rate environment and management’s warning of lower vehicle growth in 2024.

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2. Etsy

Etsy reported mixed financial results for the fourth quarter. Gross merchandise sales (GMS) fell approximately 1%, marking the third time GMS has declined in the last four quarters. But revenue still rose 4% to $842 million thanks to strong momentum in advertising services, and non-GAAP EBITDA rose 4% to $235 million.

Management also provided mixed guidance. The bad news is that Etsy expects a low single-digit decline for GMS in the first quarter. The good news is that the situation should improve from then on. The company is confident that GMS will return to growth in the second quarter as it benefits from investments in product development and brand marketing.

Etsy uses artificial intelligence (AI) to improve search and discovery with the goal of attracting more buyers and increasing their purchase frequency. That strategy could be effective since the company specializes in unique products such as artisanal and handmade goods. These items are difficult to manage, which can make the search overwhelming. Etsy uses AI to not only serve relevant search results and ads, but also to prioritize quality items from trusted sellers.

So far, these efforts have produced mixed results. The number of active buyers in the market rose 3% year-on-year in the fourth quarter, although GMS per active buyer fell 4%. However, as I mentioned earlier, management believes GMS’s growth will accelerate throughout the year. That indicates the company is confident that investments in search technology and brand marketing will have a more meaningful impact in the near term.

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With that in mind, the investment thesis is simple. Etsy operates the sixth most popular online marketplace in the world as measured by monthly visitors, and the company has differentiated itself from other retailers by focusing on non-commoditized inventory. That means Etsy is well positioned to benefit as e-commerce becomes more prevalent, economic conditions improve and investments in the company pay off.

In fact, Morningstar analyst Sean Dunlop believes annual revenue growth will return to the mid-teens by 2025. That makes the current valuation of 3.6 times sales quite cheap. The road ahead is likely to be bumpy, and the chances of a 100% return in the next twelve months are virtually non-existent. However, Etsy stock could certainly beat the market over the next five years.

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Trevor Jennevine has positions in Etsy and Tesla. The Motley Fool has positions in and recommends Etsy and Tesla. The Motley Fool has a disclosure policy.

2 Cheap Growth Stocks to Buy Before They Soar 71% and 100%, According to Select Wall Street Analysts was originally published by The Motley Fool

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