The Nasdaq Composite it has declined for three consecutive quarters and the tech-heavy index is currently 31% off its high, well past the threshold for a bear market. Some of the richest investors in the world have treated that recession as a buying opportunity.
In the third quarter, Bamco’s billionaire hedge fund manager Ron Baron strengthened his position in Tesla (TSLA 1.22%), which now accounts for 15% of its portfolio. Similarly, Coatue Management’s Philippe Laffont more than tripled his stake PayPal holdings (PYPL -0.89%)which now accounts for almost 5% of its portfolio.
Clearly, Baron and Laffont have high convictions in Tesla and PayPal, respectively. Is it time to buy these growth stocks?
1. Tesla: The leader in battery electric vehicles
Tesla had a record 343,830 shipments in the third quarter, up 42% from a year earlier, but that figure still missed the consensus estimate on Wall Street. Some investors interpreted the shortage as a demand problem, but management says the main cause was unexpected limits on outbound logistics capacity. This issue is ultimately temporary, and the company has begun “smoothing regional builds throughout the quarter” to reduce end-of-quarter bottlenecks, according to CFO Zachary Kirkhorn.
Despite this issue, Tesla still had an 18.5 percent market share in battery electric vehicle (EV) sales in the first three quarters of the year, while the runner-up BYD accounted for 11.9% of sales. Better yet, Tesla posted impressive financial results in the third quarter. Revenues increased 56% to $21.5 billion and free cash flow skyrocketed 148% to $3.3 billion as the company once again reported an industry-leading operating margin.
This result comes from a relentless pursuit of production efficiency. For example, proprietary battery cell technology allows Tesla to pay less (per kilowatt-hour) to produce battery packs – the most expensive part of an electric car – than any other automaker, and analysts at Cairn Energy Research Advisors they claim that the cost advantage will last through the end of the decade. But Tesla has shown its ability to innovate in other ways as well, from its direct-to-consumer sales strategy to one-piece casting techniques.
Looking ahead, investors have plenty of reasons to be excited. Tesla will deliver its first semis this year and ramp up Cybertruck production next year. It also plans to produce a robot taxi in 2024. The company also plans to make its full self-driving beta software (FSD) available to all North American customers by the end of 2022. This is particularly noteworthy because management expects FSD technology to become the most important source of profitability over time.
Currently, Tesla shares are trading at 7.7 times sales. It’s very expensive, compared to other automakers, but that’s a discount to its five-year average of 10.5 times sales. At that price, Tesla isn’t for the faint of heart. But patient investors willing to keep the volatility going should consider buying a few shares of this growth stock today.
2. PayPal: The most accepted digital wallet in North America and Europe
PayPal operates a two-sided payment platform with 432 million active accounts. The company provides hardware, software and financial services that help merchants manage their businesses in physical stores and e-commerce, including solutions for marketing, payment processing, fraud prevention and returns management. Additionally, its PayPal and Venmo digital wallets enable consumers to discover business deals, earn rewards, access credit, and spend money in the physical and digital worlds.
PayPal benefits from massive scale and a trusted brand that increases conversion rates, order value, and repeat purchases for merchants. According to CEO Dan Schulman, consumers are “twice as likely to shop when a PayPal button is present” at checkout. This value proposition has made PayPal the most accepted digital wallet in North America and Europe.
In the third quarter, the company topped consensus estimates on its top and bottom lines as revenues increased 11% to $6.9 billion and free cash flow increased 37% to $1.8 billion . Better yet, the cost-cutting initiatives are poised to generate $900 million in savings this year and $1.3 billion in savings next year, according to management. This will increase its operating margin by at least 1 percentage point in 2023.
Looking ahead, investors have good reason to be optimistic. PayPal puts its total addressable market (TAM) at $110 trillion, but it will only process $1.4 trillion in payments this year. This means he only captured 1% of his TAM. Management is working to capitalize on this opportunity through investments in high-conviction areas such as payment solutions and digital wallets.
For example, PayPal has recently deepened its ties with Apple increase acceptance in physical locations. Using Apple’s Tap-to-Pay service on iPhone, merchants will soon be able to accept payment cards and mobile wallets through the PayPal and Venmo iOS apps. In addition, consumers will be able to add PayPal and Venmo-branded payment cards to their Apple wallets next year.
PayPal is also driving acceptance in digital venues. Venmo is now an active payment option Amazon.comthe most visited online marketplace in the world.
Right now, Paypal shares are trading at 3.5 times sales, just above the three-year low of 3.1 times sales. This creates an attractive buying opportunity for patient investors.
John Mackey, CEO of Whole Foods Market, a subsidiary of Amazon, serves on the board of directors of The Motley Fool. Trevor Jennewine has positions in Amazon, PayPal Holdings and Tesla. The Motley Fool has positions and recommends Amazon, Apple, BYD, PayPal Holdings and Tesla. The Motley Fool recommends the following options: $120 long calls in March 2023 at Apple and $130 short calls in March 2023 at Apple. The Motley Fool has a disclosure policy.