For those with many years left before retirement, investing in growth stocks is a must. While they may be more volatile than cheap value stocks, high-quality growth stocks have the potential to grow wealth by leaps and bounds over the long term.
After the post-pandemic downturn in growth stocks, the AI revolution and the prospect of lower interest rates should breathe new life into growth stocks. Here are three all-star names trading at very reasonable prices today.
Broadcom
Broadcom (NASDAQ: AVGO) hadn’t gotten much credit for growth before the AI revolution. Until AI hit, Broadcom’s strategy was to buy highly profitable and stable semiconductor franchises in communications infrastructure, adding infrastructure software to the mix in recent years. It was essentially a private equity strategy designed to buy companies, cut costs, and milk profits.
But the AI revolution and Broadcom’s recent acquisition of VMware have stoked the fires under growth prospects. AI has turbocharged two of Broadcom’s businesses: one in custom ASICs that cloud giants use for their own internal accelerators, and another in high-speed Ethernet networking chips and optical components. Each of those businesses grew three to four times this year compared to 2023, which is staggering growth.
And with the massive acquisition of VMware that closed in late 2023, management not only managed to cut costs, but also accelerated VMware’s growth. By innovating a new data center virtualization platform, focusing on the largest enterprises with the deepest pockets, and charging a premium, management grew VMware’s quarterly revenue from $2.1 billion to $3.8 billion in just two quarters, even as operating expenses declined!
While AI chips and VMware will undoubtedly slow, their growth will still be strong in the coming years. In the meantime, these fast-growing companies will soon account for more than 50% of Broadcom’s total revenue. With AI chips and VMware fueling growth and demand for more acquisitions in both hardware and software, Broadcom is still a bargain, even near its all-time highs.
Sea limited
Southeast Asian e-commerce, fintech and video game giant Sea limited (NYSE: SE) was a darling of the pandemic, but then fell on hard times. His hit mobile game Free fire saw declining user numbers and revenues and a ban in India due to geopolitical concerns, while higher interest rates limited growth in other activities.
However, management showed its agility by cutting costs and achieving profitability in early 2023, within a year of interest rates rising.
Now that profitability has stabilized and inflation is falling, Sea is finding a happy medium between the pandemic-era of hyper-growth and the slower but more profitable period afterward.
The most recent quarter saw solid growth across all three businesses. The Shopee e-commerce platform grew 33.7% in revenue, digital financial services grew 39.5%, and the digital entertainment segment returned to growth after a low point last year, with bookings up 21.1%. And despite a return to reinvestment in growth, particularly in e-commerce, the company remained profitable overall on a GAAP basis.
Sea appears to have cemented a leading position against rivals in Southeast Asia’s digital economy, which is set to see strong growth in the coming years. According to Bain & Co., Southeast Asia’s economy is expected to grow at an average rate of 5.1% over the next 10 years, even faster than China.
With Sea’s shares now trading at just 3.5 times sales and still 78% below 2021 highs, this is another growth stock poised for another breakout.
Aehr test systems
Aehr test systems (NASDAQ: AEHR) makes test and burn-in equipment that is primarily used to test automotive chips, particularly new silicon carbide chips that are increasingly being used in new electric vehicles. Test and burn-in equipment allows chipmakers to expose chips to severe heat conditions while they are still on the wafer before they are packaged into a device. As a result, the technology has generally been used in chips that must operate under challenging conditions, such as automotive and industrial chips.
But while the EV market has been booming in recent years, it took a big downturn about a year ago, which is why Aehr Test Systems is down 78% from its July 2023 highs.
If you believe the electric car market will eventually recover, perhaps helped by lower interest rates, then Aehr could be a bargain.
Not only that, but the company recently made a major announcement for revenue beyond just EVs. On September 5, the company announced that it had received an order for six Sonoma machines to test AI accelerators from a major cloud infrastructure player. This is Aehr’s first-ever order for machines for AI accelerators.
Given the increasingly power-hungry and heat-generating nature of AI chips, it’s quite possible that Aehr’s solutions will be adopted in greater numbers not just by this AI company, but by other AI players as well. Given AI’s hyper-growth outlook, Aehr may have another great growth segment on its hands, making the recent slump a potentially great buying opportunity.
Should You Invest $1,000 in Broadcom Now?
Before buying Broadcom stock, here are some things to consider:
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Billy Duberstein and/or his clients have positions in Aehr Test Systems, Broadcom and Sea Limited. The Motley Fool has positions in and recommends Sea Limited. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
3 Breakout Growth Stocks to Buy and Hold for the Next Decade was originally published by The Motley Fool
