2 growth stocks on my buy list
It has been a bruising 18 months for many growth stocks. With higher interest rates making it harder for many young companies to access funding, proven business models can count for a lot.
But the market turbulence has also opened up buying opportunities for long-term investors.
Here are two growth stocks on my buy list. One I would happily buy at its current price if I had spare cash to invest. I would like to buy the other one too, but only if I can get it cheaper than is the case now.
Tripadvisor
I was excited to buy shares in online travel specialist Tripadvisor (NASDAQ: TRIP) a few months ago. Since then though, they have gone down in value. I see that as a buying opportunity for my portfolio.
Last week’s release of first quarter results did not go down well with investors.
Revenue rose 42% year on year. But costs rose too, with total operating expenses up 37% compared to the same period in the prior year. The company reported a net loss for the period of $73m, more than twice as large as the same quarter last year.
Looking at cash flow
With that sort of result, why am I excited about Tripadvisor? I think its strong brand and unique customer proposition are valuable assets at a time of surging travel demand.
I also think the earnings numbers do not tell the whole picture when it comes to business performance. Free cash flow in the first quarter was $119m. On an annualised basis, that suggests free cash flow could be close to half a billion dollars. The company is sitting on cash and cash equivalents of $1.1bn. Yet its market capitalisation is only twice that, at $2.2bn.
That looks like a cheap valuation to me.
I think Tripadvisor could be a free cash flow machine in coming years as long as it keeps a lid on costs. A weak economy could burst the travel bubble, hurting revenues and profits. But, in the long term, I think travel demand should be significant. Tripadvisor should benefit.
Intuitive Surgical
Medical robotics maker Intuitive Surgical (NASDAQ: ISRG) has an excellent business model.
It operates in a field with robust demand: surgery. By helping to automate processes, it can offer deep-pocketed healthcare providers with cost and consistency benefits.
As well as selling machines, lucrative revenues can come from peripherals such as surgical instrument attachments that are replaced after each operation.
I think competition will increase, possibly hurting profit margins. But with patented technology, a large installed base of machines and a unique library of past operations for training purposes, I think Intuitive has a strong competitive advantage.
This is exactly the sort of growth stock I would be happy to own in my portfolio – if I could buy it at an attractive price. With a price-to-earnings ratio of 82 however, the shares just look too expensive for my tastes.
So for now, although it is on my long-term buy list, I will not be making a move on Intuitive until the share price becomes significantly cheaper.
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C Ruane has positions in Tripadvisor. The Motley Fool UK has recommended Intuitive Surgical. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023