For those with many years before retirement, it's imperative to be invested in growth stocks. While perhaps more volatile than low-priced value stocks, over a long period of time, high-quality growth stocks have the potential to compound wealth by leaps and bounds.
After the post-pandemic downturn in growth stocks, the AI revolution and the prospect of lower interest rates should reignite growth stocks again. Here are three all-star names trading at very reasonable prices today.
Broadcom
Broadcom(NASDAQ: AVGO) hadn't been given much credit for growth prior to the AI revolution. Up until AI hit big, Broadcom's strategy was to buy highly profitable and stable semiconductor franchises across communications infrastructure, while adding infrastructure software to the mix in recent years. It was really a private equity strategy designed to buy companies, cut costs, and milk profits.
However, the AI revolution and Broadcom's recent acquisition of VMware has lit a fire under its growth prospects. AI turbocharged two of Broadcom's business: One in custom ASICs used by cloud giants for their own in-house accelerators, and another in high-speed ethernet networking chips and optical components. Each of those businesses grew between three and four times over this year relative to 2023, which is stunning growth.
And with its massive VMware acquisition closing late in 2023, management not only managed to cut costs, but also accelerate VMware's growth at the same time. By innovating a new data center virtualization platform, concentrating on the largest enterprises with the deepest pockets, and charging a premium, management has grown VMware's quarterly revenue from $2.1 billion to $3.8 billion in a span of just two quarters, even as operating costs went down!
Though AI chips and VMware are bound to decelerate, their growth should still be strong for years to come. Meanwhile, these high-growth businesses will soon combine to exceed 50% of Broadcom's total revenue. With AI chips and VMware underpinning growth and the appetite for more acquisitions across both hardware and software, Broadcom is still a buy 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 fell on hard times afterwards. Its hit mobile game Free Fire saw declines in users and monetization and a ban in India over geopolitical concerns, while higher interest rates lowered growth in its other businesses.
However, management showed its agility by cutting costs and achieving profitability by early 2023, within a year after interest rates spiked.
Now with profitability stabilized and inflation coming down, Sea is achieving a happy medium between the hypergrowth pandemic era and the slower but more profitable period thereafter.
The most recent quarter showed solid growth across all three businesses. The Shopee e-commerce platform grew revenue 33.7%, digital financial services grew 39.5%, and the digital entertainment segment returned to growth after bottoming last year, with bookings up 21.1%. And despite a return to reinvesting in growth especially in e-commerce, the company remained profitable overall on a GAAP basis.
Image source: Getty Images.
Sea seems to have solidified a leadership position over rivals in Southeast Asia's digital economy, which should see strong growth in the years ahead. According to Bain & Co., Southeast Asia's economy is projected to grow at a 5.1% average rate over the next 10 years, even outpacing China.
With Sea's stock trading at just 3.5 times sales and still 78% below its 2021 highs, it's another growth stock ready to break out again.
Aehr Test Systems
Aehr Test Systems(NASDAQ: AEHR) makes test and burn-in equipment mainly used to test automotive chips, especially new silicon carbide chips increasingly used in new electric vehicles. Test and burn-in equipment allows chip manufacturers to subject chips to rugged heat conditions while still on the wafer before they are packaged into a device. Hence, why the technology has generally been used in chips that need to function in challenging conditions, such auto an industrial chips.
Yet while the EV market boomed in recent years, it entered a severe downturn about a year ago. Hence, why Aehr Test Systems is down 78% from its July 2023 highs.
Still, if one thinks the EV market will eventually bounce back, perhaps helped along by lower interest rates, then Aehr could be a bargain buy.
Not only that, but the company recently made a consequential announcement for revenues beyond just EVs. On Sept. 5, the company announced it had received an order of six Sonoma machines to test the AI accelerators of a large cloud infrastructure player. This is the first-ever order of Aehr's machines for AI accelerators.
Given the increasingly energy-hungry and heat-generative nature of AI chips, it's quite possible Aehr's solutions may be adopted not only by this AI company in greater numbers, but other AI players as well. Given AI's hypergrowth prospects, Aehr may have another great growth segment on its hands, making the recent swoon potentially a terrific buying opportunity.
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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.
