Oct 6, 2023
Investor and entrepreneur Kevin O’Leary wasn’t always a fan of electric car company Tesla (TSLA) — even when his own son Trevor O’Leary was interning for the firm.
When Trevor suggested his dad invest in the company, the older O’Leary balked, claiming he told him: “I want to short that stock, it’s such a joke.
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“It’s a car company trading at a ridiculous price.”
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Trevor’s response? “No, Dad, you’re the joke. I work there, you don’t understand.” As a software engineer, Trevor saw the value of Tesla’s ability to collect data from its fleet of vehicles that would eventually fuel the company’s self-driving ambitions. As the fleet expanded, Tesla’s price-to-earnings (P/E) multiple dropped from 1,401 in 2021 to 69 today.
O’Leary claims he eventually took his son’s advice and added the stock to his personal portfolio, a decision that delivered over 1,000% in total return over time. The experience highlights the need to look beyond valuations when a company is rapidly expanding. Some of the best growth stocks justify their high P/E ratios over time.
With that in mind, here are three growth stocks that could justify their multiples within a few years.
Nvidia
It’s difficult to pick winners in the ongoing battle over generative artificial intelligence. Tech giants are investing billions of dollars into this new sector but the business model isn’t completely clear yet. What is clear, though, is there’s a growing demand for semiconductors.
Nvidia (NVDA) has already posted stellar earnings based on this tailwind. Revenue was up 88% between the first and second quarter of this year. It was up 101% from the same quarter last year. As the battle intensifies, Nvidia is likely to emerge as a prime beneficiary.
The stock currently trades at a P/E ratio of 102. Given its current growth rate, that ratio could drop to more modest levels rapidly. Keep an eye on this growth stock.
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Rocket Lab
The commercial space industry has matured enough to become an attractive spot for investment. Unfortunately the most popular company in this industry, SpaceX, is private. But publicly listed Rocket Lab (RKLB) is worth some attention. The company offers rocket-launch services, focusing on small satellites instead of heavy payloads.
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Between 2021 and 2022, the company more than tripled its revenue. In the second quarter of 2023, the team delivered $62 million in revenue, up 12% year-over-year. However, the company is still operating at a loss, which means a PE ratio doesn’t apply. Instead, the stock could be valued on a price-to-sales ratio of 9.
Essentially, Rocket Lab is an attractive growth stock in a fascinating industry that deserves a closer look if you’re seeking out growth opportunities.
NuBank
FinTech startup NuBank (NU) was backed by none other than Warren Buffett when it went public in 2021. The stock has struggled since and is now trading 41% below its offering price. But Buffett remains committed to the story.
In the three-month period ending June 30, NuBank added 4.6 million new customers to its platform. That represents 28% growth year-over-year. Revenue, meanwhile, soared 60% during this period. The digital bank is also profitable, registering net income of $262.7 million in its latest quarter.
These impressive numbers are being reflected in the stock price, which is up 95% year-to-date. But the P/E ratio is also high at 494.66. On paper, this stock looks egregiously expensive. But if Buffett thinks the price is justified, the stock probably deserves closer inspection from retail investors.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
