At the recent Berkshire Hathaway annual meeting, Charlie Munger noted that while Warren Buffett’s mentor, Benjamin Graham, is known as the godfather of value investing, over half of his lifetime profits actually came from one great growth stock: GEICO Insurance.
So while the last 18 months of market action hasn’t been kind to growth stocks, this dip may be the perfect time to scoop up some high-quality growth names for the long haul.
On that note, these two all-star leaders in their respective fields could be excellent additions in May.
Amazon
Amazon (AMZN) has had a strong bounce off its lows; however, the stock still sits roughly 40% below its all-time highs of 2021. That still leaves significant upside for the e-commerce and cloud leader.
Like many pandemic beneficiaries, Amazon saw its growth explode, then grind to a halt as COVID subsided. Currently, higher interest rates have crimped both consumers and businesses seeking to buy fewer goods and spend less on cloud services.
Amazon has admitted it over-built its e-commerce infrastructure during the pandemic as it tried to help consumers, and didn’t know how long the stay-at-home economy would last. However, CEO Andy Jassy seems to have adapted well over the past year, taking Amazon’s expanded footprint and making it much more efficient.
A recent Wall Street Journal article highlighted some of the ways in which Amazon changed its e-commerce operations, dovetailing on improvements noted in CEO Andy Jassy’s recent shareholder letter and Amazon’s first quarter earnings report.
In the revamp, Amazon has transitioned to a regional model from a national one, setting up eight U.S. regions meant to operate on a largely self-sufficient basis. In the new model, all regions have commonly purchased items fully stocked, so that Amazon doesn’t have to ship an item across the country unless it needs to.
Moreover, Amazon has tweaked search results depending on one’s location, with in-region items often getting a higher ranking than out-of-region items. This tweak has resulted in 76% of orders being fulfilled within a customer’s region, up from 62% a year ago. The combination has led to a 15% decrease in average distance travelled, which lowers costs and shortens delivery times. And since faster delivery tends to lead to more purchases, this is good not only for costs but also revenue.
This is already showing up in Amazon’s recent results, with e-commerce sales beginning to reaccelerate last quarter relative to last year, and paid units shipped now growing at a faster pace than overall shipping costs for three quarters in a row.
Yes, Amazon Web Services’ growth has decelerated severely as Amazon helps customers optimize their compute and storage costs in preparation for an economic slowdown. However, I would expect that when this period of optimization is over, growth should reaccelerate.
After all, enterprises using artificial intelligence in their operations will need lots of cloud storage and compute capacity. And remember, this time last year, it was the e-commerce segment that was struggling. As management has been able to turn the ship around in e-commerce, so too should it find a way to improve AWS figures going forward.
ASML Holdings
The artificial-intelligence space has gotten a lot of attention in recent months, which should put an onus on leading-edge processors and advanced memory in the years ahead. That should mean lots of growth for semiconductor equipment leader ASML Holdings (ASML), because ASML has a monopoly on key extreme ultraviolet lithography (EUV) technology needed to make the most advanced leading-edge chips.
Leading-edge processors are needed for AI applications, so the more the industry needs, the better for ASML’s equipment sales. In addition, while the memory industry is in a severe recession, causing some of ASML’s customers to push out their equipment deliveries, eventually EUV will be needed on the most advanced DRAM nodes as well. AI needs lots of memory and storage, especially advanced ultra-fast DRAM to feed data to the processor.
But ASML isn’t just seeing strong demand for EUV machines on the leading-edge, it’s also seeing high demand for standard deep ultraviolet lithography (DUV) machines that make chips and memory of all nodes and sizes. Here, massive demand is coming from mid and trailing-edge chips that go into growing applications like energy infrastructure and electrified autonomous vehicles. CEO Peter Wennink noted on the recent conference call:
I think this is something people underestimate how significant the demand in the mid-critical and the mature semiconductor space is, and it will just grow double-digit whether it’s automotive, whether it’s the energy transition, whether it’s just the entire industrial and products area, whether it’s the — whether those are the sensors that we actually need as an integral component of the AI systems. This is where the mid-critical and the mature semiconductor space is very important and needs to grow.
While management noted that some customers, particularly in the memory space, have pushed out orders, the mature node logic customers hungry for ASML’s machines have snapped them up.
From a big-picture perspective, ASML management notes its backlog was nearly 39 billion euros at the end of last quarter — nearly double its 2022 revenue, and more than ASML can supply in 2023, even with projected 25% growth.
So, ASML’s proprietary technology should be able to grow through this chip downturn, with very bright prospects through the rest of the decade.
— Billy Duberstein
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Source: The Motley Fool