Market volatility is picking up again, with major sell-offs in many top stocks. Tesla(NASDAQ: TSLA) and Cognex (NASDAQ: CGNX) have plummeted in recent weeks, while Plug Power(NASDAQ: PLUG) continues its multiyear downtrend.
Here's what's driving the sell-off in these growth stocks and whether they are worth buying on the dip.
Image source: Getty Images.
From growth to value, to growth again
Daniel Foelber (Tesla): Tesla has been on a roller coaster in recent years. Long known as a growth stock, Tesla has historically been valued based on its potential profits and cash flows rather than what it is generating today. But that all changed in late 2022 when Tesla's price-to-earnings (P/E) ratio plummeted below 35, and its forward P/E tumbled under 30.
Tesla's stock price would go on to double in 2023 -- pushing the valuation back up to growth stock levels. It looked like Tesla was back to maintaining its high operating margin and consistent sales growth. However, Tesla simply hasn't been putting up the results that investors had come to expect, which is weighing on the stock.
TSLA Revenue (TTM) data by YCharts
As you can see in the chart, revenue and earnings have stagnated, and margins are noticeably down from peak levels. The pace of electric vehicle (EV) adoption has slowed, which is challenging the notion that consumers would flock to affordable EVs and the world would move past the internal combustion engine. Tesla is talking less about EVs in its earnings calls and more about big ideas like robotaxis, robotics, artificial intelligence, its Optimus robot, and more.
Morgan Stanley analyst Adam Jonas is valuing the core auto business at $59 per share and the full company at $310 a share. If you're a Tesla bull, that's not a big deal because the price target implies around a 50% jump in the stock price. But suppose you are more skeptical of Tesla's ability to monetize its moonshot ideas. In that case, there's a significant downside risk if Tesla's auto business really is worth less than a third of its current valuation.
In years past, Tesla's valuation was based on the mass-market sale of EVs. It succeeded, the stock has been a long-term winner, and Tesla has impacted the global auto industry. But today, the fundamental investment thesis has once again changed. With growth slowing and a P/E ratio of 58.5, buying Tesla stock now is a bet on its innovation. The good news is Tesla has a rock-solid balance sheet and can generate free cash flow to fund its ideas.
In this vein, Tesla is vastly different from an up-and-coming start-up that can take on debt or dilute its stock to fund ideas. Tesla has the dry powder to take leaps -- but if the investment thesis is based on the performance of those leaps, it will need at least one to be a big hit.
If you're willing to jump into the unknown with Tesla, then the stock could be worth buying now. But if you prefer more certainty, looking for other opportunities is a better choice.
Near-term weakness is creating a buying opportunity at Cognex
Lee Samaha(Cognex): The machine vision company's revenue comes from its customers' capital spending plans. It's a great place to be when its customers' end markets are in growth mode and ramping up production of smartphones, automobiles, EVs, batteries, etc. However, it's very challenging when their end markets are weak, and they focus on cutting growth plans.
Unfortunately, this is a year of the latter, and based on management's results and commentary on the second-quarter earnings call, it's getting worse. Its logistics (e-commerce warehousing) and semiconductor end markets are the only bright spots. However, its traditional internal combustion engine (ICE) automotive and EV battery business appears to have taken another leg down lately rather than bottoming out. CEO Rob Willett said he had continued "to have tempered expectation for investment in 2024" from consumer electronics.
Still, when you are buying a stock, you are buying its value, not making a vote on its near-term prospects. Moreover, the heavy discounting in the stock creates a buying opportunity, given the company's long-term growth trajectory. There's little doubt that automation and machine vision are the future of manufacturing, as products are becoming more complex, and manufacturers are looking to improve quality control and productivity by using automated processes that require machine vision.
The reality is that Cognex has always had highly volatile but uptrending long-term revenue growth, and it's often a good time to buy when investors are feeling pessimistic about the near term, as they are now.
Plug Power has grown revenue at a steady clip... but there's more to the story
Scott Levine (Plug Power): Plummeting more than 81% over the past year, Plug Power stock is, undoubtedly, on the radar of those looking for chances to scoop up growth stocks on the cheap. Take a step back and consider the hydrogen stock's performance over the past three years -- a period during which it has dropped more than 90% -- and it may seem even more ripe for a buying opportunity. But while investors can pick up shares while they sport a less expensive price tag, it doesn't mean they should rush to do so.
To Plug Power's credit, it has done an impressive job of increasingly selling customers on its fuel cell and hydrogen products. In 2023, Plug Power reported revenue of $891.3 million, a 27% year-over-year increase. The persistent problem for Plug Power isn't at the top of the income statement, though -- it's at the bottom. Despite the company's revenue growth success, it has failed to generate similar profit growth. Similarly, it has failed to generate consistent positive cash flow.
PLUG Revenue (Annual) data by YCharts.
Consequently, it has steadfastly relied on raising capital by issuing debt and equity to keep the lights on. Most recently, this was demonstrated when the company announced it would sell about 78 million shares to raise about $200 million.
Until the company can show significant (and sustained) progress toward achieving profitability and positive cash flow, investors should look elsewhere to scratch their itches for hydrogen stocks or growth stocks in general.
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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cognex and Tesla. The Motley Fool has a disclosure policy.
