Last year was a difficult year for most investors. Inflation and rising interest rates throttled growth stocks that had been dominating the markets for the past few years. So will 2023 be any different? That remains to be seen. Here at SavvyCanadianFinance we always like to preach time in the market beats timing the market. You know, that old chestnut. Even when things are bleak, and trust us we know things are bleak, keep that long-term view of the market in mind. With that being said, we’re always proponents of being greedy when others are fearful! We’ll talk about 3 growth stocks for 2023, but before that, here’s some background on what growth stocks are.
What is a Growth Stock?
Generally speaking, stocks are divided into two categories: Growth vs Value. A growth stock is, as its name suggests, in a high growth mode of its business cycle. These are typically younger companies that operate in emerging industries. Think cloud computing, electric vehicles, or SaaS businesses.
What is the appeal of growth stocks? Well, there is a chance for outsized growth in the future. Understandably, these stocks are riskier investments than older, blue-chip value stocks but you trade that risk for higher potential returns. The key word here is potential. This is not the dotcom bubble where you can just buy any internet stock. You always have to do your research into companies and project how realistic that future growth is.
Growth companies are typically unprofitable at this stage and are reinvesting their revenue back into their business. Growth stocks also trade at high price multiples. This is because these stocks trade at forward-looking multiples because investors are already anticipating future growth. If the company reaches that potential, then the stock can soar even higher. But if it doesn’t, we could see the price of that stock come crashing back down to Earth.
Are Growth Stocks a Good Investment?
Despite the year they just had, growth stocks are a great investment for some investors, but not all. Growth stocks are best suited for investors with:
- A well-diversified portfolio
- A long investing horizon
- A higher appetite for risk
Over the long term, many growth stocks have far outperformed the markets. We are talking thousands of percent returns on your initial investment. But choosing the wrong stocks can lead those investments to bring massive losses. This is why doing your research into companies and their industries is such an integral investing skill to have!
Growth stocks primarily return capital gains on your investment through the expansion of their business. Typically, growth stocks do not payout dividends so investors seeking out an income stream will want to look at value stocks or dividend-paying ETFs instead.
3 Growth Stocks for 2023
Taiwan Semiconductor Manufacturing Company
|Ticker Symbol||NYSE: TSM|
|Market Capitalization||$374 billion USD|
|Current Stock Price (January 2023)||$73.85|
|52-Week Trading Range||$59.43 to $145.00|
|Forward Price to Earnings Ratio||12.69|
Our first growth stock for 2023 is the rare tech stock that made its way into Warren Buffett’s portfolio. Taiwan Semiconductor Manufacturing Company is the world’s largest chip foundry company. This means that it creates microchips that are designed by companies like AMD (NASDAQ: AMD) and NVIDIA (NASDAQ: NVDA).
Last year Buffett invested $4 billion into TSM making it the tenth largest holding for Berkshire Hathaway (NYSE: BRK). While recessions are hardly a good time for chip and technology companies, TSM has such a large market share that it likely won’t be affected as much as other brands. TSM’s largest customer is Apple (NASDAQ: AAPL) and even though it is taking most of its production out of China, TSM is setting up foundries in the United States to cater to its prized client.
Why We Like Taiwan Semiconductor Manufacturing
TSM also services the likes of AMD, NVIDIA, Marvell (NASDAQ: MRVL), Broadcom (NASDAQ: AVGO), and MediaTek. It is even the rare growth stock that pays out a dividend with a generous 2.41% annualized yield. This shows how much cash TSM generates on an annual basis. We would not be surprised if TSM is a trillion-dollar company at some point over the next decade.
Meta Platforms Inc
|Ticker Symbol||NASDAQ: META|
|Market Capitalization||$327 billion USD|
|Current Stock Price (January 2023)||$125.44|
|52-Week Trading Range||$88.09 to $343.09|
|Forward Price to Earnings Ratio||15.04|
Meta Platforms, formerly Facebook, is probably one of the most polarizing stocks on the market. It is also one of the most controversial companies in the world. If you are an investor that does not like to invest in companies you do not support, then that is totally fine. You can skip ahead to the next stock. But for those who like an incredible cash-generating business with the two largest social media platforms in the world, let’s talk Meta.
Meta Platforms is the parent company of apps like Facebook, Instagram, and Whatsapp. It has nearly 3 billion daily active users across its platforms and that number jumps to nearly 4 billion for monthly active users. Much of Meta’s revenue comes in the form of ad revenue and as we all know, in times of a struggling economy, one of the first things to get cut is ad spending.
The stock’s current price is assuming little growth and a status quo for the current economy. Ad spending is expected to rise as early as this year and the company still managed to see a rise in users last year. This is equating to what could be a major rebound in the stock later in 2023.
Why We Like Meta Platforms
Of course, the elephant in the room is how much the company is spending on the Metaverse. Many are calling it a fool’s errand, especially as early returns on the Metaverse are nowhere near what Mark Zuckerberg had predicted. Again, we are still at such an early phase of the Metaverse that even if Zuckerberg is just half right about it, all of this spending will be well worth it.
Meta’s current price-to-sales ratio of 2.8 is historically low for the stock. Its five-year price-to-sales multiple is closer to 9, so you’re getting a nearly 66% discount on its historic price. You might not like the company or the founder, but when the economy bounces back to normal and ad-spending returns, Meta could be one of the best deals on the market.
|Ticker Symbol||NYSE: SQ|
|Market Capitalization||$38.66 billion USD|
|Current Stock Price (January 2023)||$64.64|
|52-Week Trading Range||$51.34 to $163.89|
|Forward Price to Earnings Ratio||39.06|
We’ve found that investors really don’t know how to feel about Block, formerly known as Square. The company started out as a payment tool for small businesses but has evolved into a full-blown digital payments ecosystem. The Cash App has more than 80 million annual users now and has grown into a full-on stock and Bitcoin investing platform.
Block’s stock got ahead of itself during the initial stages of the COVID-19 pandemic. The stock price ballooned to well over $200 per share at its peak. But now that Block is trading at a price-to-sales multiple of just 2.02, things become a little more attractive. Block has shown some nice growth throughout 2022 despite the performance of its stock.
The company recently opened up its Cash App payment system outside of its own network. It has partnered with companies like American Eagle, Tommy Hilfiger, Finish Line, JD Sports, SHEIN, and Wish to help people use the Cash App to pay for goods and services directly. It is building up its platform to potentially be a competitor to services like Apple Pay and PayPal’s (NASDAQ: PYPL) Venmo.
Why We Like Block
Why do we like Block? It is leading the charge in terms of mobile and digital payment services amongst the younger generations. Its investment in Bitcoin looks disappointing right now but if it has the long-term potential that we think it does, Block could have a fairly large corner of the payments market locked down. Don’t forget about global expansion as well. Currently, Block is only operating in a select few markets whereas PayPal and Apple Pay are worldwide. If Block chooses to grow its business internationally, shareholders could eventually be handsomely rewarded.